Q #6 (SS5 of schweser notes - regarding Liles Insurance company) - can someone better explain to me why in a Insurance surplus portfolio, a 15% allocation of developed market is sufficient - this is one of those question where you mark, lower/same/higher. According Schweser, it is SAME because “15% seems reasonable for achieving the objectives of the surplus portfolio.” I thought it would be higher than 15% allocation. Any takers? How do you discern what is reasonable for a growth focused portfolio?
The number is clearly subjective and what maters is what the CFA thinks is appropriate. But what is critical is the the terminology “developed market”. Since the surplus portfolio does not support any liability the insurance companies are likely to take more risk and pursue higher returns which would not be available in developed markets but in emerging markets/equity/alternative investments asset classes.
I agree. So, that’s precisely the reason why allocation to developed market could be greater than 15%. I’m going to be in trouble if this crap comes up on the exam. This question is like the average age of the workers in Defined pension plan, you just never know what constitutes old and not old? So subjective!
Developed market to me means the US/Europe/Japan. Allocation to this sector is maxed at 15%. Developing market (Emerging Market) would be BRICs which offer greater potential returns and greater risk. Thererfore allocation to this asset sector is higher.