Can someone explain the asset-only approach to me? I don’t understand why the investments need to have a low correlation with assets: In the liability-relative approach, the portfolio will be chosen for its ability to mimic the liability (i.e., the portfolio will have a high correlation with the liability). In the asset-only approach, the focus is instead on investments with a low correlation to assets.
I think you may referring to the fact that the Investments (such as in a Pension) should not have a significant correlation with the Company’s Assets (example - large concentration of Automaker investments in the pension fund for Ford). When Ford is doing bad - there is a good chance that the pension will do poorly also. In an Asset Liability mode - you want your Assets and liabilities to move generally in the same direction to mitigate surplus impact.
Got it - that’s what I thought.
Sounds like it’s just a typo – focus on low correlation to THE OTHER assets – to minimize overall portfolio risk. Where’s that statement from? Not CFAI or Schweser, I checked both?
qbank. Wasn’t very clear.