Random thoughts.

This is what I've been thinking about for the last 3 months, and especially in the last week, 24hrs a day, every day.

"LOS: The candidate should be able to
“Managing Institutional Investor Portfolios” (Study Session 10)
k) compare and contrast the asset/liability management needs of life and nonlife insurance
companies;
l) formulate the overall portfolio management process leading to an investment policy
statement and an asset allocation decision for an institutional investor, including developing
objectives and constraints and analyzing capital market expectations.
Guideline Answer:
A. The shortcoming with respect to the critical goal of asset/liability management is that the
bond portfolio duration (5.2) is mismatched in relation to the estimated duration of liabilities
(1.8).
The recommended changes in the asset allocation are to:
• decrease the allocations to longer duration assets such as U.S. long-term government
bonds, U.S. investment grade corporate bonds, and U.S. intermediate-term government
bonds
• increase the allocation to shorter duration assets such as cash equivalents.

Recommendation of Portfolio B is justified by the following:
• Portfolio B has a before-tax expected return of 6.74%, which meets the Trust's return
requirement of 6.71% (see Question 10A for explanation of the return requirement).
• Portfolio B has an anticipated downside risk of –8.68% [measured by the expected return
minus two standard deviations, (6.74% – (2 × 7.71%) = –8.68%)], which falls within the
downside risk tolerance criterion of no worse than –10%.
• Portfolio B has cash equivalents equal to 4.00% of assets, which meets the Trust’s
liquidity requirement of nine months’ living expenses [($78,000 / 0.7) × (9 / 12) =
$83,571 or 2.79% of the $3,000,000 in assets].

Come Saturday night this is what I will be thinking about:

" ".


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