CH:15 Choosing an appropriate investment strategy

Question 1

List 4 measurements of risk

Answer 1

• Shortfall probability: RIsk that assets fall below the minimum level, minimum solvency level
• Maximum variance of returns
• Value at Risk: Measure maximum downside risk
• Tracking error: Risk relative to benchmark

Question 2

What influences the risk appetite of an institution

Answer 2

• Nature of institution
• Any constraints set by the institution’s documentation - trust deed
• Any statutory constraints

Question 3

Factors influencing investing strategy for an institution

A SAD CUTER INVESTOR

Answer 3

A - Accounting regulation

S - Size of assets (absolute and relative to liabilities)
A - Accrual of future liabilities
D - Diversification

C - Currency of liabilities
U - Uncertainty of liabilities
T - Tax treatments of assets / investor
E - Environmental, social and governance
R - Risk appetite
I - Institution’s objective
N - Nature of liabilities
V - Voluntary and legal restrictions
E - An existing portfolio of assets
S - Solvency requirements
T - Term of liabilities
O - Other funds’ strategies (competition)
R - Return (expected long-term)

Question 4

Factors influencing investing strategy for an individual

Answer 4

• their assets and liabilities and matching cashflows
• risk arising, in particular the variability of market values
• returns from different asset clases
• contraints, both investment and practical constraints