ALM allocation with Monte Carlo?

CFA Level III
#1

Can someone help me interpret the portfolio graphs that illustrate the probability of maximum surplus over the investment horizon? In reading 21 - Asset Allocation - for ALM / monte carlo analysis. I understand the main point but the particulars are messing me up, namely:

1.) In the Schweser text, there are three portfolios each with its own graph. Portfolio A only shows one line that is labeled, 90%, 50%, 10%. How can one line represent three probabilities? The other portfolios have individual lines for each.

2.) The conclusion is that Portfolio B is most appropriate and has a Std Dev of Surplus = 0.0 and is thus the MVSP. Not sure how this is the conclusion – the initial data set says Portfolio A has a Std Dev of Surplus = 0.0 and is the MVSP. So which is it and how can you draw this conclusion just by looking at the graph?

Thanks in advance!

#2

1 line for all 3 probabilities - since the std deviation of surplus = 0% for Portfolio A.

Portfolio B and C have different from zero Std Deviation of Surplus - hence 3 different lines.

#3

and I think that the line is a typo “It is reasonable to conclude that B has a 0 Std Deviation of Surplus …”

I think it should read A.

#4

How is it reasonable to conclude the std dev is 0.0% if you are told that the std dev of is 0.0% - no reasoning required, right?

– So basically, if there is one line, then the std dev of surplus must equal 0.0% - only one outcome bc there is no variability, and thus the portfolio is the MSVP? This must mean the portfolio falls on the vertical axis if Std Dev = 0.0?

– It appears that portfolio A also meets the surplus horizon, so why is B deemed most appropriate?

#5

A is too conservative. Low Risk=Lower Return.

So B - or a linear combination of B & C in 80:20 ratio - has a higher return and higher risk… so would be more appropriate.

C by itself would end up not providing the resources required (being able to meet the liabilities) at the 30 year horizon at a 10% Probability level.

#6

But A appears to still meet the 30 year surplus requirement, no? So if it meets the requirement with less risk why is it not suitable – because ALM purpose is too also MAXIMIZE the surplus which B does a better job of ??

So can there by no probability of falling short, hence why C is deregarded?