Just studied these so I thought I would summarize and self reinforce. -Risk measures for individuals often cannot be expressed the same as institutional investors. Monthly std dev doesn’t help them determine how to pay for sons college. -Investors often present their return objectives in terms of goals -Investment professionals can frame risk and return in terms of likelyhood of acheiving theis goals Lifestyle Protection -Lifestyle protection is used when an investor wants to express goals in terms of spending. For instance they want to know how much they can spend per year without running out of money. -The risk return trade off is framed as expected spending vs minimum spending. As the investor chooses higher expected spending he must implicitly assume lower minimum spending. -Advisor then reverse engineers a portfolio to meet these needs at the specified level of confidence. Cash flow matching -Investors that present a fixed, nominal schedule of CF, for instance $5000 per month -Advisor can structure a bond portfolio to defease the CF but should remind the investor that portfolio value will fluctuate a lot -Advisor should use long term bonds so as to minimize reinvestment risk. This assumes long duration thus high portfolio interest rate risk. Fixed Horizon -Used for an investor that has a goal some time in the future, for instance retiring or college -Presents a similar tradeoff to lifestyle protection, but with expected value and minimum value as the tradeoffs. -Advisor helps investor choose a portfolio that fits their needs -Not path dependent, ie does not discuss or promise any particular value along the way. For instance a minimum value of $1,000,000 in 10 years does not imply the value cannot fall below that level in the interim.
I looked at this too both in CFA and Shweser. The latter includes under lifestyle protection: 1 Absolute Return Basic this is what these assets could return range high/low 2 Asset Allocation One-up from (1) using monte carlo apporach 3 CF matching (as above) The expensive, asset-heavy solution; and 4 Fixed planning horizon insured strategy. This is part CF-match, and part asset alloc (monte carlo) I believe. Do schweser break down Fixed horizon into Insured FH and asset alloc? Where does asset alloc come into this… Also, Are objective-related risks/risk of loss/shortfall risk basically the same thing? Maybe this is worth discussing?