Chapter 17 - other assumptions

Question 1

How can you quantify the risk of investing in the company’s shares?

Answer 1

Difference in return between:
- a well-diversified portfolio of shares
- some risk-free asset
Need to take into account how risky a particular company’s shares are in relation to a well-diversified portfolio

Question 2

Expected return on any asset

Answer 2

CAPM formula p.g.8

Question 3

Features that can make product design riskier

Answer 3

• lack of historical data
• high guarantees
• policyholder options
• overhead costs
• complexity of design
• untested market

Question 4

How can statistical risk be assessed?

Answer 4

• in some cases analytically by considering the variances of the individual parameters used
• by using sensitivity analysis with deterministically assessed variations in parameter values
• by using stochastic models for some, or all, of the parameter values and simulation
• by comparison with any available market data