Litterman - Ch 10

[TiderInsider]

This is the "Strategic Asset Allocation in the Presence of Uncertain Liabilities" chapter.

One thing that is confusing me...on page 417 of Goldfarb's manual he has a table that shows the optimal equity allocation given a funding ratio and then has the following statement:

As this table shows, under funded plans should invest little, or possibly even negative amounts in equities to ensure that they get the best hedge against their liabilities. As the funding ratio rises, the optimal allocation to equities rises.

But in the text in italics we read

The bottom line is, equities become increasingly attractive the more under funded the liabilities are and the more uncertain the liabilities are.

Why would the optimal allocation be negative, if an underfunded plan would benefit from being more heavily invested in equities? Does anyone else think this is a contradiction?

TIA.

[TiderInsider]

I think this answers it....search first, then post!
http://www.actuarialoutpost.com/actu...ight=litterman

[The Smokin' Cracktuary]

Wait, you are telling me that you don't understand how an underfunded plan must invest in equities to keep from falling more underfunded, but is better off investing in bonds??

If you don't understand such a simple concept, you have no hope. See you next spring.

[TiderInsider]

I'll see your mom next spring.

[The Smokin' Cracktuary]

Originally Posted by TiderInsider

I'll see your mom next spring.

Oh yeah. Tell her I said what's up.

And just a little advice..... Appletinis

[TiderInsider]

Thanks!

[remilard]

Originally Posted by The Smokin' Cracktuary

And just a little advice..... Appletinis

I heard your mom prefers bonds.

[namssa]

Originally Posted by remilard

I heard your mom prefers bonds.

Brilliant!

[Laurelinda]

Originally Posted by remilard

I heard your mom prefers bonds.

If you were a gentleman, you would, too.

[The Smokin' Cracktuary]

Originally Posted by remilard

I heard your mom prefers bonds.

James Bonds?