R28: Overview Of PWM

Question 1

How to evaluate capital sufficiency? Pros and cons?

Answer 1

Deterministic forecastic - simple, unrealistic, assumes average return for entire period.

Monte carlo simulation - many possible paths, can assess probability of achieving goal.

Question 2

Ways to analyse retirement goals? Useful for? Cons?

Answer 2

Mortality table - life expectancy and probability of survival at different ages. Probability adjusted future CF needs. Longevity risk.

Annuities - uses annuity prices to determine PV of retirement spending needs. Reduces longevity risk but not useful if not planning on using annuities.

Monte Carlo - many possible paths, dynamic situations, probability of shortfall. Model risk and doesn’t calculate shortfall magnitude.

Question 3

What are the two ways to construct a portfolio?

Answer 3

Traditional - constrained MVO on asset classes and include other external exposures and tax considerations.

Goals-based - MVO on each goal to a max vol or to a probability of success. Easier to express risk tolerance for each goal but may not be mean variance efficient for whole portfolio.

Question 4

How can you evaluate success?

Answer 4

Goal achievement
Process consistency
Portfolio performance (absolute vs relative)
Definition of success

Question 5

What are the ethical considerations?

Answer 5

Fiduciary duty and suitability
Know your client
Confidentiality
Conflicts of interest