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#221




DNMMR  Tasks 2 & 4. I guess I am at a loss at how to retackle Task 2. Task 4 will follow the risk/return requirements and metrics that I use in Task 2, so I am not really worried about that question. But, I am starting to get a little flustered. This is my second DNMMR for the Final Assessment.
So, my approach to Task 2 was to initially set a maximum level for volatility (which essentially limits the amount invested in risky assets, or equities), then my goal was to find the lowest possible CTE at the 95% confidence level. I ran something like 20 scenario, found the scenario that matched my risk/return requirements, and then I used that asset mix percentage (which was 25% Treasuries, 65% Bonds, and 10% Equities). Then, I used the mean for that given scenario to be the annual contribution amount. I thought that was a good approach to the question, but for some reason, and for the second time, the graders did not agree. Any thoughts as to how one may improve this approach or how you may approach this problem? Should I set the Equity Percentage first (say 10%), run dozens of scenarios, and then find the one that has the lowest coefficient of variation? I am thinking of maybe using a ratio for this attempt? Ultimately we want the volatility for the asset mix to be low as we want the fund to remain solvent. That is the primary, fundamental purpose of this fund.
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FAP 
#222




I am not sure if anyone is still following this discussion but here goes:
I see many people especially Sir Isaac saying that he minimized mean/CTE. This would mean that we are maximizing CTE. What is the logic behind that? My gut feeling tells me hes on to something but I can't seem to figure it out. Thanks! 
#223




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I think I mentioned it before but the basic idea was if two portfolios have a similar cte the one with the lower mean has better risk/return tradeoff. So you can think about it as as minimizing the mean for portfolios with similar CTE risk. Higher CTE implies higher risk, with higher risk comes higher potential for higher return. So by maximizing the CTE and minimizing the mean I am getting best risk/return tradeoff. Also I posted this, I’m quoting it in case you or someone else finds it helpful: 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. Please don’t use it if you don’t understand it. Attempt to understand it first Last edited by Sir Issac; 01122019 at 11:56 AM.. 
#226




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Hi Sir Isaac, I actually understood it. Thank you! I wouldn't have used it if I didn't understand it because I wouldn't have been able to explain it. thank you so much!! Can I ask you one more thing? When they say to discuss the Pros and Cons, does that mean we need to list the pros and cons of them separately? For example like list the pros and cons for the mean, var, maximum....or list the pros and cons of a combination of risk/return metric? You explanation from before makes me think its the latter since the mean, var, maximum...are just expressions of return and not the actual risk/return metric. Thank you again! Really appreciate it!! 
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#228




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Hi BabyHorse15, Thank you so much! Really appreciate it! 
#229




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I listed the pros and cons separately. 
#230




Someone sent me a private question and I thought I'd be helpful to put the question here with the answer in case someone relates to the question.
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cdef, fa task 2, final assesment 
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