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© STRATEGIC ASSET ALLIANCE, INC. Document not to be reproduced without the explicit consent of SAA. Always contact a professional before making any investment decision. This presentation is not to be considered a recommendation.
Stress Testing to Guide the Asset Allocation Decision
December 10, 2015
Mr. Alton Cogert, CFA, CPA, CAIA, CGMA
President & CEO
Rational Expectations Hypothesis
o Agents inside the model, on average, assume the model’s predictions are valid.
o Normative returns, risk, standard deviation
NEW Rational Expectations Hypothesis
o There is not one true model
o Agents don’t always act in their best interests (behavioral finance, ‘black swans’)
o ‘Worst case’ returns – scenario based
There is more than one appropriate model
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Stress Testing
Rational Expectations Hypothesis
o Use Markowitz Efficient Frontier
Test Your Assumptions
Internally Consistent
Use Forecast, but Compare to Historical
NEW Rational Expectations Hypothesis
o ‘Worst Case’ Since the Depression
Impact on Surplus
Impact on BCAR
Excellent tool for supporting Rating Agency visit
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Stress Testing
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‘What Keeps You Up At Night’
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Risk Asset Stress Testing
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Corporate Bond Stress Testing – BIG Example
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Corporate Bond Stress Testing – BIG Example
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Corporate Bond Stress Testing – BIG Example
QUESTIONS?
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