Essay Notes

2016
Monte Carlo simulations shows that the return requirement can be safely set equal to the return expectations only if expected returns have no volatility
If switching from a fixed spending rate to a rolling spending rate, a firms total target spending rate will be higher using the new rolling spending rule,
because higher portfolio values in the earlier years make the rolling average higher than the lower recent portfolio value
The duration attributed to a foreign bond in a domestic portfolio is found by multiplying the bonds country beta by the foreign bonds duration
o Duration of foreign bond in domestic portfolio = Dforeign bond x
The corner portfolio closest to the tangency portfolio is the one with the highest Sharpe ratio
Monte Carlo analysis captures the multi-period effects of tax changes
A shortcoming of Monte Carlo analysis is that it uses historical data. It doesnt consider future market expectations
Longevity risk is increased when regularly scheduled payments for life are converted to a lump sum

2015
Regarding pension plans, if a firm has a young workforce, this implies a long duration of Plan liabilities, and the plan should have higher tolerance for risk
The absence of an early retirement provision within a pension plan increase the duration of Plan liabilities, and allows for higher risk tolerance
The asset-only pension management approach considers a low-risk pension investment as one having a low correlation with the portfolios existing assets.
The liability-driven approach views a low-risk investment as having a high correlation with the pension liability
Mean reversion analysis assumes that the spread will revert to its historical average. You should rank each bond with the following formula:

o
current spreadhistorical mean spread The bond with the highest number is the best one to purchase
standard deviation spread
o Redo Part D of #3
Its always best to choose unsmoothed real estate indexes, as these correct for biases such as infrequent appraisal-based valuations
Higher salary implies high future wages and thus higher human capital. Higher correlation implies more volatile wages; using a discount rate to account for
results in a lower value for human capital