Here’s a problem I had with one of the BSAS questions: The questions was: Based on long term liabilities, high liquidity, and high risk aversion, which benchmark would be MOST appropriate? A) Short term Corp Bond Index B) Intermediate Term High Yield Index C) Long Term Asset Backed Bond Index. What do you guys think?
i’m guessing C as it probably means agencies. def not B. A is the other thought…though doesn’t match the liabilities, and you can have high risk aversion and invest long.
me too C for the same reason as KRocheli
I’m guessing it is going to be A, but only because C is asset backed.
I won’t wait for any other answers. I chose C, because A didn’t match the liabilities, B is just stupid, and C is long term, liquid and relatively safe because asset backed. Wrong. Answer was A, and the reason given: Based on risk aversion level, high yield would be less appropriate. Based on liquidity needs, short term would be more appropriate. Income needs also in line with corp. index. I don’t get that. Doesn’t even MENTION C in the answer. And what liquidity needs? This question is not connected with data from the vignette. Anyone have any ideas?
My guess is that liabilities are discounted at risk free rates relative to maturity, so the corporates, even though shorter in maturity will still provide the level of income needed to satisfy the liability? Wait…that sounds dumb.
Yeah. Like I said…dumb.
I wanted to say A just because it is short-term. I think low duration is more appropriate for high liquidity and high risk aversion. As I over thought it I started to think C, along the lines of, the closer the match between the liability and asset duration the less interest rate risk…
complete and utter garbage!!! i didn’t even attempt it.
I agree. This question sucks.