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An Actuarial Approach to Asset Evaluation and Allocation

Author: LiZhaoYu
Tutor: PanHePing
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: Asset value assessment Asset Allocation Actuarial techniques and methods Interest Rate
CLC: F840
Type: Master's thesis
Year: 2009
Downloads: 59
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Abstract

Once the personal financial responsibility, means that the financial life cycle begins. Despite the different cultures and different socio-economic strata of people's financial life cycle is different, but their focus is approximately the same - buy different financial products in order to achieve the financial stability of the life cycle at different stages. The face of the existence of a large uncertainty in the financial world, people, a lot of financial management tools to deal with this problem. However, unfortunately, not all problems can be solved. Although the asset allocation or higher frequency vocabulary - Financial financial planning \However, if you want to achieve financial stability of the life cycle, we must clearly recognize that this is the life of the business plan, involving different types of financial products (annuity plan, social insurance schemes or long-term investment objectives, and so on). In addition, more importantly, should have a business plan the main frame structure to support the balance and reconfigure to maximize the long-term goal. Therefore, it is necessary to understand the specific assets and liabilities and are familiar with the characteristics of various financial instruments. This is not just help us to assess the value of the assets, it is in order so that we can from the point of view of a long, sober look at the issue of asset allocation. However, in the financial sector, it is hard to find all of the principles and application of refined statements more often, individuals need to be extracted from their own experience, to form their own views. Of course, the concept can also affect the attitude of the individual asset allocation and liability management. However, due to the constraints on personal knowledge and experience enable individuals is inevitable when you look at the problem does not exist limitations often can not grasp the problem resulting in either ignored important issues, or one-sided view of the problem overall, global thinking, to make investment decisions resulting life cycle financial stability is threatened. For example, if you moment to recognize the risk is always associated with the objectives established? Implies the risk of potential losses, but the loss of what should be measured by what? If the goal is to ensure the stability of the single value of the assets, then the value of the assets to reduce the loss of this the likelihood of losses is the risk. But if the goal is to ensure there are sufficient assets to match the liabilities, then the reduction in the value of an asset may or may not be damage to the target. Broad diversified portfolio of assets and liabilities, the combination of individual factors on the impact of changes are likely to be changes in other elements of the offset. As another example, the main purpose of risk control is to maximize return on investment of the assets in certain risk constraints. Are located on the side of the risk / reward risk due to a lot of problems to be solved, so it is easily ignored out The main objective of this neglect ROI is one of the biggest risk in the asset-liability management model. Well, we need to create a business plan framework allows us to maintain an appropriate asset value assessment and distribution point of view and positions, in order to achieve two basic objectives: First, in some way the proper management of assets and liabilities to maximize long-term gains ; Second, and more importantly, to be able to arrange plans to implement the main body how to survive in extremely adverse circumstances. When we create a business plan, it should be recognized that: asset allocation method of choice depends on the purpose of asset accumulation, consistent with the purpose of asset accumulation asset allocation strategy can be said to achieve a good avoidance and risk control objectives. Our aim is very clear - to maintain the financial stability of the life cycle. However, for a variety of economic and business environment, select the appropriate asset allocation strategy and the model is not imagined so simple. Because the various characteristics of the assets and liabilities involved in capital market uncertainty as well as a wide range of time span, to achieve this goal of financial stability within the life cycle, the economic analysis of assets and liabilities may be relatively simple, but more likely is an extremely complex practical work. When an asset or liability modeling, you should first determine the asset or liability arising from cash flow models (time and quantity). Then, these cash flows will be the impact of the development of capital markets (such as interest rates and stock market gains), but also the need for capital market variables to model and determine the asset or liability cash flow sensitivity of these variables. Finally, in order to quantify the degree of sensitivity of the economic results that may occur, you may also need a large number of economic assumptions for analysis. For example in terms of modeling, the product has a strong savings purposes, and it does not contain the market in the future to determine the obligations of responsibility (minimum rate of return), then the mean - variance analysis framework or It extended model is very appropriate. For more complex situations, in theory, there are two ways to achieve: First, using a cash flow risk-based adjustment method, discounting all results in the risk-free interest rates. If these adjustments can be approximated by adjusting the forecast assumptions, then we can get a valuable, realistic assessment model; is a joint balance model to help achieve rational allocation of the asset. When all factors are taken into account, it would be wise should be: select the assets and liabilities of the joint model. This is not only difficult to operate because the first method, the more main reason is the use of the balance joint model created a business plan strategy includes consideration of the following questions: 1, the presence of any one item or business entities Its purpose is pursuing the interests, not just limited to the risk-averse. 2, the fluctuations in the value of financial products at the same time brought us the opportunity also inevitably bring about the risks. 3, the risk does not only mean the loss of opportunities, more likely to imply the loss of intangible value. 4, the number of any risk management and control methods are not copied to manage some risk can not be copied directly used for other types. 5, the portfolio of assets and liability portfolios or assets and liabilities combined together if we can achieve consensus on the overall diversification dispersed, can reduce the risk. 6, the wider the range of choice of the assets in the portfolio, the greater the probability of effective risk diversification. 7, within a continuous period segment cash flow decentralized configuration not just conceptually meaningful, in fact, in many cases is quite necessary. Often in seemingly greater the difficulty, the cash flow decentralized configuration can be achieved. 8, effective asset and liability management appropriate asset allocation strategy can increase revenue while reducing risk. 9, the greater the exposure to risk, the required risk premium will be higher. However, even if it is completely the same asset in the eyes of investors with different purposes, the risk is different. This difference, give us the right asset allocation risk provides a good opportunity. 10, although the true value of the financial markets is unpredictable, but in most cases, the financial market is cyclical, with liquidity. Cyclicality: the market with an average income level, even if the specific figures can not be foreseen with certainty, but this provides the basis for the theory of asset allocation. Because the issue is not always pay attention to the fluctuations in the value of the assets under management, but the main body in extremely adverse circumstances can survive. Therefore, pursuant to take the assets and liabilities of the joint model focuses on the analysis and study of how existing investment constraints to achieve the objectives defined in the investment policy - how to choose personal life with a good distribution of investment products balance of payments problems to achieve a lifetime of wealth. From the structure, this paper first discusses the need for a reasonable choice of investment products and recalled the history of the development of the theory of asset allocation, followed by discusses risk assessment issues faced by the asset allocation, and thus to further explore traditional asset allocation theory inadequate, and thus in the traditional investment allocation model based on the introduction of actuarial principle value of the assets assessment and allocation model to control the financial risk and the analysis and discussion of the key assumptions of the model - the interest rate. Then, with the actual actuarial models created to do a case study. Finally, summarized and discussed throughout the model application conditions may also place limitations. The most outstanding feature of this paper is the use of the term structure modeling random assessment of cash flow interest rate risk management and interest rate depends. For example, to determine the expected cash flows of the cash flow of the annuity and life annuities unified treated as a fixed cash flow. Of the future annuity payment guarantee as a form of interest rate options, and its risk management and assessment using the random method. Actuarial model include the relationship between the model of an asset, a liability model, a portfolio model with a group of assets and liabilities. Mainly of the following three questions: First, how neutral asset allocation strategy to calculate the proportion of investment in each asset class, as a portfolio investment performance relative measure of the benchmark. Describe the neutral asset allocation may be due to changes in the assets and liabilities and how to make the adjustment at any time. Third, under what circumstances, for any reason will result in asset allocation away from the neutral configuration. A long time, the the actuary usually the development and use of traditional asset allocation method for interest rate risk management and assessment methods is first set an interest rate used to assess the degree of sensitivity of cash flow and determine the assessed value of the cash flow to interest rate changes. The biggest drawback of this method, it is assumed that the yield curve is flat. It is clear that, historical data show that, the drive changes in interest rates is not deterministic process. Asset value assessment assigned actuarial model uncertainty in recognizing the changes in interest rates, based on the variance and covariance of expected returns estimated in various types of assets and return on assets, interest rates as a bridge links the various types of cash flow throughout model through the use of modern portfolio theory is constructed to be able to represent the best balance of risk and expected \The fundamental starting point is: \

An Actuarial Approach to Asset Evaluation and Allocation

Abstract

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