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#251
09-19-2019, 10:58 AM
 TinyTim7 Member SOA Join Date: Sep 2014 Location: Virginia Studying for STAM College: University of Illinois, Urbana-Champaign Favorite beer: Root Posts: 54

Quote:
 Originally Posted by ARodOmaha I used the modified Sharpe ratio in my first attempt, and CTE(90) in my second attempt, failing both. I hear what you guys are saying about using common sense and using the metrics as guides. But then how would you approach the sensitivity tests? It says to use the same risk/returns metrics. Do you have re-analyze every possible scenario in order to get the sensitivity? It would seem clearer with a formula approach like I was using.
For sensitivity testing, I used the asset class mix I recommended from task 2 and the given (default) assumptions as my base. The asset mix never changes, but the statistical measures will change when you vary an assumption. My sensitivity analysis was basically looking at the % change in statistical measures (the same measures I used in task 2) from the base assumption.
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#252
09-19-2019, 11:30 AM
 andrew.meier22 Member CAS SOA Join Date: Jan 2018 College: Rutgers Universit Alumni Posts: 40

It had been suggested to me to use the idea of an efficient frontier to pick an asset class mix. I understand how I would use that to choose the mix but I’m not seeing how you could really do a sensitivity analysis using this? I guess you would just have to plot the new return and SD on the same play as the initial scenarios and see Where it lies but there’s really no quantitative measure of that change.
#253
09-22-2019, 12:33 PM
 mnm4156 Member SOA Join Date: Oct 2015 Posts: 41

Can someone please explain what using the CTE 95 metric for determining the cost per employee would tell us in the context of the CDEF situation? Let's say that using the CTE 95 metric would result in a cost per employee of 800. So a tax amount of 800 would sufficiently cover future liabilities with 95% certainty? or is that what Var 95 tells us?
#254
09-22-2019, 02:01 PM
 ARodOmaha Member SOA Join Date: May 2016 Location: Omaha, NE Studying for GHDP College: University of Nebraska (alma mater) Favorite beer: Captain Morgan Posts: 214

Quote:
 Originally Posted by mnm4156 Can someone please explain what using the CTE 95 metric for determining the cost per employee would tell us in the context of the CDEF situation? Let's say that using the CTE 95 metric would result in a cost per employee of 800. So a tax amount of 800 would sufficiently cover future liabilities with 95% certainty? or is that what Var 95 tells us?
CTE(95) is the mean cost per employee in the top 5% of scenarios. Since we don't know the exact distribution, you could only say it would be sufficient in OVER 95% of scenarios. Your statement would apply more to VaR(95).
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#255
09-25-2019, 07:03 PM
 ReturnStudent Member SOA Join Date: Dec 2015 Location: Chicago Studying for PA College: UNL Alumni Posts: 220

Quote:
 Originally Posted by Sir Issac Original submission I only used mean, cte and var as risk/return metrics and said minimize all but like I said in my post they are not really a risk/return metric. And I suggested minimizing the mean/cte in my second Basically if two portfolios have a similar cte the one with the lower mean has better risk/return tradeoff
Would someone please explain to me why this is the case?
I'd think the other way around was correct because:
Mean / CTE = expected return rate over risk.
Given 2 portfolios with the same risk value (CTE in the denominator), the one with higher mean (expected rate of return) would have better risk/return trade off.

Thanks!
#256
09-25-2019, 07:23 PM
 DjPim Member SOA Join Date: Nov 2015 Location: SoCal Posts: 699

Quote:
 Originally Posted by ReturnStudent Would someone please explain to me why this is the case? I'd think the other way around was correct because: Mean / CTE = expected return rate over risk. Given 2 portfolios with the same risk value (CTE in the denominator), the one with higher mean (expected rate of return) would have better risk/return trade off. Thanks!
To answer your question, if two portfolios have the same CTE, then they are similar in risk, correct. As in, the bad-case scenarios are similar. Remember that in this case, we want lower numbers, because this is a cost imposed. So, the lower the mean required contribution, that means you got a higher return, and therefore it is better.

Worth repeating though that pretty much all feedback received is to not use a ratio.
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#257
09-25-2019, 08:29 PM
 mnm4156 Member SOA Join Date: Oct 2015 Posts: 41

how do we know that the mean measures return only and CTE measures risk only? i understand CTE is a risk measure, but its not clear to me why the mean would be a return measure.
#258
09-25-2019, 08:40 PM
 DjPim Member SOA Join Date: Nov 2015 Location: SoCal Posts: 699

Quote:
 Originally Posted by mnm4156 how do we know that the mean measures return only and CTE measures risk only? i understand CTE is a risk measure, but its not clear to me why the mean would be a return measure.
The higher the return on your investments, the less money you need to collect as a tax. Mean will give you a rough idea of an expected required tax, and if that mean is low, that means your returns must have been high.
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Quote:
 Originally Posted by Dr T Non-Fan "Cali" SMH.
#259
09-25-2019, 10:11 PM
 mnm4156 Member SOA Join Date: Oct 2015 Posts: 41

Quote:
 Originally Posted by DjPim The higher the return on your investments, the less money you need to collect as a tax. Mean will give you a rough idea of an expected required tax, and if that mean is low, that means your returns must have been high.
i understand that but can't you also look at it both ways? its measuring how risky the asset portfolio is because its calculating the mean tax contribution that is needed to offset the level of risk of the portfolio. i feel like thats why the Q refers to the metrics as risk/return metrics and not risk and return metrics
#260
09-26-2019, 03:52 PM
 DjPim Member SOA Join Date: Nov 2015 Location: SoCal Posts: 699

Quote:
 Originally Posted by mnm4156 its measuring how risky the asset portfolio is because its calculating the mean tax contribution that is needed to offset the level of risk of the portfolio.
I think you're confused about what a 'risk' is.

Now let's say none of your 1 million simulations are the same. Some say you lose all your money, some say you make 1000% return some years, etc etc--it's all over the place. Averaging these simulations up, you find your "average" return. Now if I ask you what you think the exact return will be on your next simulation, you'd probably say there's no way to know, it varies too much. You could tell me the average, which gives me a ballpark of where your distribution might be centered, but you wouldn't be confident the next simulation would be close to the average. Therefore, high risk, high volatility.

ETA: The average you do find in scenario 2 still tells you something about your return, just not the level of risk associated with it. Easy to picture a bell curve, and this average tells you where your distribution is centered, but doesn't tell you the weight of the tails.
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Quote:
 Originally Posted by Dr T Non-Fan "Cali" SMH.

 Tags cdef, fa task 2, final assesment