Chapter 15: Investment strategy for institutions and individuals

Question 1

List 4 measurements of risk

Answer 1

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

Question 2

What influences the risk appetite of an institution

Answer 2

1. Nature of institution
2. Any constraints set by the institution’s documentation - trust deed
3. 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

1. More relaxed - don’t need to show solvency
2. Short-term time horizon, so short-term fluctuations bother them
3. Diversify + Expertise: CIS
4. Choose assets with good return + tax efficiency
5. Utility + feel good
6. Don’t match against liabilities
7. Risk appetite depends on: age, wealth, dependents