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Actuarial Science 142 > Investment - Corobulo's Notes > Flashcards

Investment - Corobulo's Notes Flashcards

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1
Q

List:

Investment and risk characteristics

A 
SYSTEM T
S - security
Y - yield
S - spread (Capital volitality)
T - term
E - expenses
M - marketability

T - tax

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2
Q

Money market instruments ex.

A

Bank deposits and short-term equities

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3
Q

Features of money market instruments

A 
Security:  Depends on issuer
Yield:  Real but not high
Spread:  Low
Term: short term
Expenses: Minimal
Exchange rate:  varied
Marketability: good
Tax:  return taxed as income
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4
Q

Bond

A

Fixed interest or index-linked security that is traded on a bond market.

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5
Q

Features of government bonds

A 
Security: usually very good
Return: lower than shares but better than cash = GRY
Capital volatility: depends on term
Term: greater than a year
Expenses: low dealing expenses
Exchange rate: varied
Marketability: good
Tax: income and capital gains may be taxed differently
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6
Q

Yield Curve Theory

A
  • Expectations theory
  • Liquidity Preference theory
  • Inflation risk premium
  • Market Segmentation
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7
Q

Features of corporate bonds

A

Similar to government bonds, but:
Security: less secure than government
Returns: GRY expected to be higher than for government bonds
Expenses: Higher dealing expenses, but still low
Exchange rate: less varied
Marketability: much less (depends on issue size)

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8
Q

3 types of corporate bonds

A
  • Unsecured loan stock
  • Debentures
  • Subordinate debt
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9
Q

Unsecured loan stock

A

Loan not secured on any assets

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10
Q

Debenture

A

Loan stock assured against the assets of the company

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11
Q

Subordinate debt

A

Ranks behind other class of debt

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12
Q

3 Assessments for bond security

A
  • Income cover
  • Capital cover
  • Credit ratings
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13
Q

Features: Preference shares

A

Dividend: fixed percentage on par value
Cumulative
No final redemption date
No voting rights

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14
Q

Cumulative feature of preference shares

A

Means that if a dividend is unpaid, the arrears must also be paid off before any payment is made to ordinary shareholders.

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15
Q

4 Yield characteristics

A
  • Nature of return
  • Expected return vs. other asset classes
  • Correlation of returns with other asset classes
  • Currency of returns
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16
Q

Return and risk characteristics of equities

A

Security: Depends on long term company profitability
Yield: Long term real
Spread: Capital & income values can be volatile
Term: Can be held in perpetuity
Expenses: linked to marketability
Marketability: depends on company size

Return: higher than government bonds over long term

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17
Q

List Asset Classes Risk, Return Characteristics

A

RETURNS:

  • Taxation and expenses (reduction)
  • Expected return
  • Nature of returns
  • Volatility of returns
  • Correlation of returns with other asset classes
  • Currency of the asset proceeds

ASSET:

  • Term of the asset
  • Security
  • Marketability
  • Liquidity
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18
Q

3 Types of Money Market instrument issuers

A
  • Banks
  • Companies
  • Government (local / central)
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19
Q

4 Money market instruments issued by banks

A
  • Call deposit
  • Term deposit
  • Notice deposit
  • Certificate of deposit
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20
Q

2 Money market instruments issued by governments

A
  • Treasury bill (central government)

- Local Authority bill (local government)

21
Q

2 Money market instruments issued by companies

A
  • Commercial paper

- Bill of Exchange

22
Q

Assumption of Gross Redemption Yield

A

Assumes that you could reinvest the coupons at exactly the same rate,
Ignores expenses and tax.

23
Q

Uses of money market investments

A
  • Meeting expected liability outgoings
  • High degree of uncertainty in liability outgo
  • Possible investment opportunities
  • Recent Cashflow
  • Short-term investment
    • Rising interest rate
    • Start of a recession
    • General economic strategy
24
Q

For bonds the following holds regarding the yield curve:

A

Higher Price Lower GRY

Lower Price Higher GRY

25
Q

Return and Risk Characteristics of Property

A

Security: void, default, political risk, obsolescence, deterioration, refurbishment costs
Yield: Stepped income stream, long-term real returns
Spread: Long-term volatility of capital values, short-term stability due to infrequent valuations

Expected return: higher than on index-linked government bonds. Between conventional bonds and equities
Marketability: unmarketable - large unit size, indivisibility, uniqueness

Return:

  • Running yield between equities and conventional bonds
  • High dealing and management costs
  • Subjective valuations
26
Q

2 Elements of an option price

A
  • Intrinsic value

- Time value

27
Q

Use of derivatives

A
  • Reduce risk (hedging)
  • Increase risk/return (speculation)
  • Change portfolio characteristics (portfolio management)
28
Q

When is the time value of a derivative at its highest value

A

When the option is ‘at the money’ and at inception

29
Q

Investment strategy

A

Long-term split of assets for an investor.

30
Q

Aim of an investment strategy

A

To maximise investment return subject to an acceptable degree of risk

31
Q

Factors influencing Investment strategy for Institutions

A

Existing liabilities:

  • Nature
  • Currency
  • Term
  • Level of uncertainty
  • Size
  • Future accrual

Tax: position of investor and treatment of investments
Statutory, legal or voluntary restrictions,
Expected return, volatility, correlations for various asset classes
Need for diversification
Institution objectives & risk apetite

32
Q

2 Divisions in the investment strategy setting process

A

Matching

Actuarial modeling

33
Q

2 Matching steps in the investment strategy setting process

A
  • Choose assets that closely match liabilities by nature, term, currency
  • Useful for keeping A / L stable especially if at a low solvency level
34
Q

6 Actuarial modelling steps in the investment strategy process

A
  • Define clearly objectives and risk tolerances
  • Set up projection models for assets and liabilities
  • Asset models should be stochastic
  • Choose an initial asset split
  • Generate thousands of scenarios with the given asset split, summarise outcomes
  • Determine if outcomes meet required objectives, otherwise choose another more appropriate, asset split
35
Q

3 steps in the main overview of capital project appraisal

A
  • Initial appraisal
  • Detailed appraisal
  • The investment submission
36
Q

3 Maiin steps of detailed appraisal

A
  • Define project scope
  • Evaluate cashflows
  • Assess spread of CFs
37
Q

2 Steps involved in the assessing the spread of CFs

A
  • Sensitivity analysis

- Scenario testing

38
Q

A risk matrix sets out

A

the types of risk per stage of the project

39
Q

5 Steps in identifying project risks

A
  • High level preliminary analysis
  • Brainstorming session with experts and senior personnel
  • Desktop analysis of prior similar projects
  • Set out all identified risks and interdependencies in a risk register
  • Use of a risk matrix
40
Q

3 Assessments involved in risk analysis

A
  • Frequency and consequences of occurrence
  • Correlation between risks, controllability of risks
  • Include a NPV per risk in overall NPV
41
Q

Intangible factors considered with the investment submission before deciding on the project

A
  • Allowance for bias or uncertainty in estimates
  • “hung”
  • Knowledge not in possession of those who have prepared the submission
  • Last-minute developments
  • Doubts about feasibility or quality of implementation
  • Overall project credibility etc
  • Realistic assessment of upside potential
  • Whether sponsor criteria is sufficiently met
42
Q

3 Steps in the Actuarial control cycle

A
  • Define the problem
  • Develop the solution
  • Monitor experience
43
Q

2 Effects of the external environment

A
  • Create problems

- Have an impact on solutions

44
Q

6 Factors from the external environment on the actuarial control cycle

A

Pestle

  • Economic & Commercial
  • Social (Client expectation)
  • Technology
  • Legislative
  • Environment
45
Q

Economic and commercial factors impacting the actuarial control cycle

A
  • Impact of the general economy
  • Trends in the industry
  • What are your competitors doing
46
Q

Environmental factors impacting the actuarial control cycle

A
  • Improvements (ex. improvements in mortality)
  • Deterioration (ex. weather patterns and flooding risks)
  • Impact of what the company is doing on the environment
47
Q

3 Parts to defining the problem (Act Control Cycle)

A
  • Be precise: What is the underlying issue
  • Look at risks and/or issues associated with the problem
  • What are the potential solutions
48
Q

Risks or issues when defining the problem (Act Control Cycle)

A
  • Lack of data
  • Are estimates of claim rates reasonable
  • Do I know what expenses are likely to be incurred…

Actuarial Science 142 (23 decks)

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