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  #31  
Old 02-24-2018, 10:48 PM
LunchBox LunchBox is offline
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Originally Posted by Sir Issac View Post
If I have two portfolios with the same CTE but one with a lower mean, the one with the lower mean provides a better risk/return tradeoff.

By the way I’m not saying my metric is right and that it’s the best one (probably isn’t) I’m sure people can come up with different or better metrics
Clearly true, maximizing CTE just doesn't make sense to me. Maybe it will make sense if I run the scenarios.
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  #32  
Old 02-24-2018, 10:53 PM
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Clearly true, maximizing CTE just doesn't make sense to me. Maybe it will make sense if I run the scenarios.
If I were to do it again I personally would incorporate Sharpe Ratio instead. I would maximize the following ratio under a certain requirement for equity allocations (higher equities bring more volatility year over year and CDEF cannot afford short term losses):

(Average cost per employee from 100% treasuries - average cost per employee from a certain portfolio mix) / standard deviation

(Some people told me they're using CTE in this ratio instead of mean which also makes sense to me since you would be using the mean from worst case scenarios opposed to the general mean)

By maximizing this ratio I would be attaining the lowest possible cost per employee when comparing the cost per employee attained from the risk free rate while taking volatility into account. It's similar to the sharpe ratio example I gave but using cost per employee instead.

Last edited by Sir Issac; 02-24-2018 at 10:58 PM..
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  #33  
Old 02-24-2018, 10:55 PM
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Clearly true, maximizing CTE just doesn't make sense to me. Maybe it will make sense if I run the scenarios.
You can come up with another metric that makes more sense to you and one that you can explain well. I think that's what it comes down to. Pick a metric, provide explanation of why it's a good risk/return metric and I think you will be fine.
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  #34  
Old 02-24-2018, 11:01 PM
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Choosing CTE(95) is fine if you take a solvency perspective.
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  #35  
Old 02-24-2018, 11:04 PM
LunchBox LunchBox is offline
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Originally Posted by Sir Issac View Post
If I were to do it again I personally would incorporate Sharpe Ratio instead. I would maximize the following ratio under a certain requirement for equity allocations (higher equities bring more volatility year over year and CDEF cannot afford short term losses):

(Average cost per employee from 100% treasuries - average cost per employee from a certain portfolio mix) / standard deviation

(Some people told me they're using CTE in this ratio instead of mean which also makes sense to me since you would be using the mean from worst case scenarios opposed to the general mean)

By maximizing this ratio I would be attaining the lowest possible cost per employee when comparing the cost per employee attained from the risk free rate while taking volatility into account. It's similar to the sharpe ratio example I gave but using cost per employee instead.
Thank you for all the information, it's helpful.
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  #36  
Old 02-24-2018, 11:06 PM
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Quote:
Originally Posted by Sir Issac View Post
If I were to do it again I personally would incorporate Sharpe Ratio instead. I would maximize the following ratio under a certain requirement for equity allocations (higher equities bring more volatility year over year and CDEF cannot afford short term losses):

(Average cost per employee from 100% treasuries - average cost per employee from a certain portfolio mix) / standard deviation

(Some people told me they're using CTE in this ratio instead of mean which also makes sense to me since you would be using the mean from worst case scenarios opposed to the general mean)

By maximizing this ratio I would be attaining the lowest possible cost per employee when comparing the cost per employee attained from the risk free rate while taking volatility into account. It's similar to the sharpe ratio example I gave but using cost per employee instead.
this is really good. way above anything i did.
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  #37  
Old 02-24-2018, 11:19 PM
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I just said in good market higher equity allocation and vice versa for bad market. Optimal is somewhere in between the two
Thanks for all your advice, I'm really getting a good idea of where to go.
Did you actually list the good/bad allocations and their tax Rates?
In your suggested example, the logic is that all treasuries would be zero (ie. Using rf rate basically) and all equities would have very high SD pushing the value down. The target mix would have a nice mix of reasonable mean and ad(or cte).

What did you use for (or what do you feel would be) an appropriate tax rate?
I used the var 75 value, but I see a lot of dislike for it on the hoards here so I probably will go another direction
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  #38  
Old 02-24-2018, 11:24 PM
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Thanks for all your advice, I'm really getting a good idea of where to go.
Did you actually list the good/bad allocations and their tax Rates?
In your suggested example, the logic is that all treasuries would be zero (ie. Using rf rate basically) and all equities would have very high SD pushing the value down. The target mix would have a nice mix of reasonable mean and ad(or cte).

What did you use for (or what do you feel would be) an appropriate tax rate?
I used the var 75 value, but I see a lot of dislike for it on the hoards here so I probably will go another direction


I provided tax rate for the optimal mix only but showed suggested allocation mix for all three like the example in the prompt. I used var 95 for tax rate

I’m not sure what you’re asking in the middle but risk free rate implies 100 percent treasury allocation
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  #39  
Old 02-24-2018, 11:51 PM
arto83 arto83 is offline
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Originally Posted by Sir Issac View Post
I provided tax rate for the optimal mix only but showed suggested allocation mix for all three like the example in the prompt. I used var 95 for tax rate

Iím not sure what youíre asking in the middle but risk free rate implies 100 percent treasury allocation
Middle I was just reasoning out why maximizing works. All treasuries are 0 in numerator. All equities have very high denominator, so close to zero. So minimizing it means no risk or high risk.
Maximizing the ratio is then somehere in between, I. E. A reasonable mix that accomplishes goals.


I like this as it may be what I was missing. I didn't have a hard matrix I could point to and say that I need to maximize or minimize.
Even cv didn't work as I found the all treasury mix had lowest cv and all equities had highest. I
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  #40  
Old 02-24-2018, 11:57 PM
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Good luck!
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