Investment Pricniples

Question 1

AL ( Asset liability modelling)

Answer 1

Fundamental method for setting a strategy for an asset base which has an associated liability

Question 2

Principles of investments for a benefit arranagment

Answer 2

1) select assets appropriate to the nature, uncertainty, term and currency of its liability
2) investments should be selected to maximise the overall return on assets, after taxes and expenses
3) the extent to which matched position may be departed from in order to meet the higher returns will depend on the investor’s free assets, investors surplus and their appetite for risk

Question 3

SYCTERM

Answer 3

Security , yield , currency , term , expenses, regulation. Marketability

Question 4

Derivatives

Answer 4

Financial contracts that determine a set of payments between contractual parties.
Linked to price of underlying asset or assets
Retirement funds to get exposure to the return of asset class without actually investing
Interest rate swaps and equity options

Question 5

Hedge funds

Answer 5

Aim to use sophisticated investment techniques
Ability to take on leverage to offer risk-adjusted returns that are different to other asset classes such as bond an equity

Question 6

Factors that trustees should consider when designing an investment strategy for DB

Answer 6

1. Liability profile ( term , nature , currency , index )
2. The expected cash flow ( in and out )
3. The risk appetite of parties involved
   - mainly sponsor
   - but also members
4. The size of the assets
   - and movement ?
5. Funding level
6. Nature of sponsor
7. Financial strength of sponsor