Which of the following is a difference between the investment objective for a liability based benchmark and an index based benchmark? If a bond index is chosen as a benchmark the:
a) bond index has to be outperformed on a risk-adjusted basis.
b) objective is primarily return oriented
c) objective will be less risk averse
b , objective return oriented .
b. Your return has to match or beat a benchmark return. For a liability, the point is to match or mimic the liability
Bleh, I was torn between A and C and I went with A. My reasoning is that when you’re dealing with a liability, your primary goal is to make sure you have enough money to fund the liability. You really can’t risk going below the liability. At least with a bond index, you CAN risk going below the index as long as your risk-adjusted ex-ante expected return is higher than that of the bond index. Since I don’t know if we can necessarily say the liability requires more risk aversion than the index, I went with A: go for risk-adjusted returns.
B seems to suggest ignoring risk, whereas A seems like the same as B but better because it involves “risk-adjusted” return instead of just return.
I remember this question for Schweser. I am 99% sure its B
Wouldn’t surprise me. Do you remember why? I hope it’s something nuanced like, “Answer ‘A’ uses the phrase HAS TO BE” which is too restrictive. Answer ‘B’ just says “primarily” which is more general and applicable.
I say B because:
A has the phrase " has to be outperformed" and while that is a goal, it is not an absolute
C is incorrect - the asset base of an asset only approach would generally be invested in more risky assets
Hey FinNinja, regarding C, the answer choice says “bond index strategy will be less risk averse” a.k.a. willing to invest in more risky assets. So I’m not sure if I follow your reasoning for not picking choice C. I was thinking more along the lines that it’s impossible to determine the exact risk levels of 2 different strategies. As for A, yeah I hear ya’. That’s probably why it’s wrong assuming it is.
your right, I read that wrong. Less risk averse is like a double negative - the portfolio would take more risks.
so now I’m not sure between B and C since ALM approaches are favored when the investor has below average risk tolerance - e.g. more risk averse. AO approaches would be favored in cases where the investor is less risk averse.
I think I’ll stay with B since C has the definitive “WILL be less risk averse.” this is one of those -Would I be confident enough to change my answer on the test? cases. I’m just not confident enough in C that I think I would change my answer.
B
Yes, the correct answer is B
q-bank blows