Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

If You Use a Screen Reader

This content is available through Read Online (Free) program, which relies on page scans. Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.

Asset Allocation by Surplus Optimization

D. Don Ezra
Financial Analysts Journal
Vol. 47, No. 1 (Jan. - Feb., 1991), pp. 51-57
Published by: CFA Institute
Stable URL: http://www.jstor.org/stable/4479395
Page Count: 7
  • Read Online (Free)
  • Subscribe ($19.50)
  • Cite this Item
Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Asset Allocation by Surplus Optimization
Preview not available

Abstract

A defined benefit pension plan is effectively an operating division of the sponsor. Thus, when evaluating risk and making asset allocation decisions, it is more appropriate to focus on the plan's net worth--the difference between its assets and liabilities--than on its assets only. This requires the development of probability distributions for both assets and liabilities. Liability modeling is still in its infancy, and different models lead to radically different notions of the riskiness of liabilities. In particular, the way in which a plan's actuarial assumption for inflation/salary growth is modeled can have an enormous impact on the relative attractiveness of stocks and long bonds. Some simplified approaches to liability modeling focus on fixed dollar liabilities (the Accumulated Benefit Obligation) or on the responsiveness of inflation-sensitive liabilities (such as the Projected Benefit Obligation) to changes in discount rate assumptions. Under these approaches, liabilities behave like bonds, and long bonds constitute a large proportion of efficient pension portfolios. A model that assumes volatility in real rates, however, shows liabilities to be extremely volatile and results in efficient portfolios with a significant proportion of stocks.

Page Thumbnails

  • Thumbnail: Page 
51
    51
  • Thumbnail: Page 
52
    52
  • Thumbnail: Page 
53
    53
  • Thumbnail: Page 
54
    54
  • Thumbnail: Page 
55
    55
  • Thumbnail: Page 
56
    56
  • Thumbnail: Page 
57
    57