# R26 : Q15C/16/17/18

The solutions to the 4 questions seem strange to me. Q15C : Is it that the holding in stocks shall be 1,320,000/2,200,000 = 60% ? Q16 : Why the expected returns are not calculated according to the % of each asset class in total portfolio ? i.e., A=0.3x8%+0.3X10% = 5.4% B=0.3X14%+0.3x10% =7.2% C=0.3X6%+0.1X5% = 2.3% D=0.3X8%+0.1x4% = 2.8% Q17 : I think Portfolio B shall be more appropriate than Portfolio C because it has higher Sharpe Ratio and not so concentrate on S&P Index which is not so aggresive investment. Q18 : I think the return volatility shall be the standard deviation of the return, but what is the definition of “surplus volatility” ? Can anyone explain/clarify ? TKVM !

AMC Wrote: ------------------------------------------------------- > The solutions to the 4 questions seem strange to > me. > > Q15C : Is it that the holding in stocks shall be > 1,320,000/2,200,000 = 60% ? > Yes, 66% of financial capital and 60% of total portfolio (Financial capital+ Human Capital) > Q16 : Why the expected returns are not > calculated according to the % of each asset > class in total portfolio ? i.e., > A=0.3x8%+0.3X10% = 5.4% B=0.3X14%+0.3x10% > =7.2% C=0.3X6%+0.1X5% = 2.3% > D=0.3X8%+0.1x4% = 2.8% We need to judge whether existing weights are appropriate within and across asset classes. Your calculations would also result in same conclusions. Ans in the book is presented in a different way & I think is more appropriate. Say manager X has \$100 and he wants to maximise his return. To do that he has to decide which asset class is performing comparatively better and is there any need for tactical asset allocation. Invest \$100 in equities - LT as per existing weights (\$50 in each secutrity) Invest \$100 in equities - ST as per existing weights (\$50 in each secutrity) Invest \$100 in Bonds - LT as per existing weights (\$75 & \$25) Invest \$100 in Bonds - ST as per existing weights (\$75 & \$25) Now, manger can compare which asset class is performing better & should he resort to tactical asset allocation across & within asset class by shifting existing weights. > > Q17 : I think Portfolio B shall be more > appropriate than Portfolio C because it has > higher > Sharpe Ratio and not so concentrate on > S&P Index which is not so aggresive > investment. Objectives set by investment committee are too aggressive and risky (investments in similar co’s). Portfolio selection decision should be taken for the benefit of plan holders. Port C is well diversified and most appropriate for the ultimate beneficiaries. Manager should suggest reconciliation of investment committee’s stated objective. > Q18 : I think the return volatility shall be > the standard deviation of the return, but what > is the definition of “surplus > volatility” ? > > Can anyone explain/clarify ? TKVM ! Volatility of plan surplus (PV of plan assets > PV of plan liabilities)

Rakesh Wrote: ------------------------------------------------------- > AMC Wrote: > -------------------------------------------------- >Q17 : I think Portfolio B shall be more >appropriate than Portfolio C because it has > higher Sharpe Ratio and not so concentrate > on S&P Index which is not so aggresive investment. > > Objectives set by investment committee are too > aggressive and risky (investments in similar > co’s). Portfolio selection decision should be > taken for the benefit of plan holders. Port C is > well diversified and most appropriate for the > ultimate beneficiaries. > Manager should suggest reconciliation of > investment committee’s stated objective. Though I can not say Port C is not absolutely inappropriate, but the conclusion is more or less dependent on subjective judgment, right ? > Q18 : I think the return volatility shall be the standard deviation > of the return, but what is the definition of “surplus volatility” ? > Volatility of plan surplus (PV of plan assets > PV > of plan liabilities) I guess the calculation of the “plan surplus volatility” is similar to that of the standard deviation of the return. Rakesh, TKVM !

> > AMC Wrote: > Though I can not say Port C is not absolutely > inappropriate, but the conclusion is more or less > dependent on subjective judgment, right ? Comparatively Port C is the most appropriate for plan beneficiaries. -Well deversified -less correlated with Co’s operating business -Less risky -less cash reserves (Port A & B has higher cash allocation) -Sharpe ratio is bit lower as compared to A&B but higher than current port. I agree, subjective judgement is required for many areas within L3 (especially SS1 - SS5 & SS8) but in this Q I think choice was clear from the point of view of plan beneficiaries. > I guess the calculation of the “plan surplus > volatility” is similar to that of the standard > deviation of the return. ! I guess yes. Std deviation of returns above minimum return requirement(Surplus).

Rakesh, TKVM for your clarifications !