Task 2

[deezydowntown]

Starting discussion

[deezydowntown]

This is easily the task I'm having the most difficultly with.

[MidwesternActuary]

Yup. I have failed multiple times with Task 2 needing fixed. AO generally says to avoid the Sharpe Ratio. 

[Lynne]

I saw the Sharpe ratio post on AO. It looked fairly complicated. I think I am just gonna opt for the simpler ones: CTE, Min, Max, Mean, etc

[Matthew Rashford]

You all finished Task 1 already?

[Lynne]

No. I started at 2pm. I've been reading over the file and figuring out the spreadsheet. I saw a lot of discussions about task 2. 

[Beats S]

I used 2 of the metrics that they gave us instead of using sharpe ratio, seemed like we get mixed feedback on AO with people using sharpe ratio

[deezydowntown]

Sounds like we've all taken it before, and it doesn't change in your subsequent attempts.

[deezydowntown]

I tried creating a Sharpe Ratio type thing, but still failed.  I talked to an FSA in my office and he said that the risk free aspect of the Sharpe Ratio probably wasn't really that accurate to use, so the whole thing is a little poison.

[Lynne]

I'm assuming....

The risk/return requirement in part 2 is not the same thing as the risk/return metric in part 1? 

Is risk/return requirement about setting objectives for the target asset portfolio? 

[deezydowntown]

I think the metrics are what we get from the powerpoint like the CTE and VaR.  Once we are done talking about those, then we have to set some guidelines for how to use them.  

[Lynne]

Thanks! That was in line with what I was thinking about. 

Do you know if we are allowed to use multiple metrics in setting the requirement? 

e.g. can we say we want VaR(95) to be <... AND CTE(90) to be <... 

[Beats S]

Any advice on pros/cons of the metrics? I listed one or two of each metrics they gave. Not too sure how to answer this one.....

[AZ]

This was one of the tasks I have failed in my first attempt. The metric I used was mean * CTE.

I think that was my undoing, so this time I'm planning to go with mean / CTE.

[fopaq]

1.I am also hung up on what to put for pros or cons. What are the pro and cons of the mean? std? CTE? Var? Do you individually discuss each CTE? 75,90,95... Are the pros and cons for Cascadia or general?  

What is a recommendation? 

2. There are several interconnected issues here. How do you choose the portfolio? They are a lot of combination. Do you qualitatively chose portfolio one for example 20/30/50 and then show the metric that you chose or choose a portfolio running several portfolios using the metric you choose. The latter has to many combinations. 

3. What are risk and return statistics vs risk metrics?

4. I saw the post against ratios but lets say you use CTE. CTE only give information about the tail, two distributions can have the same tail but be really different before. CTE(75)A could be equal to CTE(75)B but MeanA lower than Mean B making A the best portfolio. Same goes for Var, std and mean.

5. Are we also supposed to reproduce the table containing the investment policy.

Just putting my thought to fuel the discussion.

[Lynne]

1. I had some trouble coming up with pros and cons for VaR and CTE. I grouped Max, Min, Mean, Std together as basic statistics. 

2. I think you are supposed to come up with an asset mix based on your requirement set in question 2. 

3. In my opinion, they are the same thing. 

[deezydowntown]

I go through and list the pros and cons of the mean, sd, CTE, and VaR.  Then I think I might try to create another metric that relates the risk and the reward statistics together.  And then I think I'll show a table to tested asset mixes, and set requirements from there, and then pick whichever on I think is best.  That's at least what I'm planning to do right now.

[Beats S]

1.I did pro/cons for just CTE and VaR without 75,90,95

2. Using the requirement they give you on the assignment, I used those as a guide to come up with a mix. But not too sure how to explain how to come up with one. How do you decide how to change each to get the best result?

[Lynne]

"the requirement they give you on the assignment", do you mean the four objectives discussed in the introduction? 

Are we supposed to test some asset mixes before coming up with specific risk/return requirements? I'm debating whether the question is just asking us to come up with requirement based on our previous knowledge. 

[deezydowntown]

I got the detailed feedback after my third fail, and one of the comments on Task 2 was about how my requirements were arbitrary.  So I don't think you can just so mean needs to be x just because that seems right.  I think providing various asset mixes gives context to your requirements

[Lynne]

That's great suggestion. Thank you! I tested a couple extreme cases to summarize some traits of the metrics. 

Another point is that. I think all of the metrics in the 'Results' tab are somewhat risk/return metrics. Because the higher the return, the lower the employee contribution, the mean somehow tells you about the return, not specially what it is but how it would affect the contribution. 

I think this task does not want to create anything new but utilize what was given to create requirements. Most importantly, justify how and why we set the requirements. 

All that being said, this is my first attempt and I could be very wrong :/. 

[windhunter]

I just submitted mine. For this question, I run about over 100 scenarios that are within my policy reasoning (diverse, low risk, etc) and chose the optimal one based on choices of metric. Good luck people. My module expire on Jan 31, so this is my first and last final I can take that has CDEF project. I cannot have a re-do :(

My watch has ended.

[LyActuary]

That's a lot of scenarios. I only ran 12 scenarios and showed 8 in the memo. 

[deezydowntown]

In my detailed feedback, they kind of insinuated that asset mixes made up of multiples of 5% are ideal.  I'm sure you don't absolutely need that though, as long as you justify

[LyActuary]

OK, Thanks! That's what I did. It would simply be too many scenarios if we don't go increments of 5%. Plus, their metrics aren't that different even with 5% increments, let alone smaller ones. 

[fopaq]

I am still puzzled about what are pro and what are requirements. For the mean for example will a pro be a basics characteristics like capture the expected return? Will a requirement be CTE should less than 100 or just should be lower?  An example will help.

[deezydowntown]

Does anybody have an idea about their asset mix yet?  I'm testing some now but I think I'm getting kind of a lot of equities.

Also does anybody have any idea how we are supposed to address the adverse and optimistic targets?

[LyActuary]

Although I don't know what you mean by "a lot of equities," I think I am getting more equities than I originally expected. But more equities effectively lower the mean of contribution. 

I don't know if we are supposed to address the adverse and optimistic targets. There is no part in the question the ask us to consider the asset mix under two different conditions. It was mentioned in the assumptions section under sample investment policy. The question did not ask us to draft a investment policy though. It 

[MidwesternActuary]

I think a high amount of equities directly conflicts with objective #4 of the legislation (Ensure the CDEF meets its financial obligations every business day). Therefore, I set a limit on it. I find it hard to justify where to set the limit though as it seems arbitrary.

[Matthew Rashford]

Are we bound to the ranges in the "Sample Investment Policy" table on page 2?  Or can we do whatever we want, e.g., 100% equities, 100% treasuries, etc.?

[Jeff M]

I had originally started by staying within those bounds, but now that you mention it, I do not think we are restricted to those bounds.

[MidwesternActuary]

You aren't restricted by it as it is a sample investment policy.

[fopaq]

They were just sample.

[deezydowntown]

Actually after reading the assignment over again, it doesn't even say anything about having an optimal or an adverse market mix.  I think I'm just going to recommend on portfolio and not mess with the other situations.

[MidwesternActuary]

In my feedback they wanted me to expand on my adverse and optimistic scenarios (What makes a scenario adverse or optimistic?) Just wanted to run this by you as it seems to me they want it included. 

[LyActuary]

Did you originally mention adverse and optimistic scenario in your write-up? 

[MidwesternActuary]

Yes.

[deezydowntown]

I had them in mine as well with like one sentence of explanation, but now I think I'm going to remove them altogether

[LyActuary]

I think if we mention them, we have to give justification of whether they are relevant to the question and what we are going to do with that. 

[windhunter]

I had similar result when I use arbitrary asset mix combination (10 of them). However when I extend the combinations I realized the high equity decision I made has similar return/risk as other low equity mix. Here is what I tried, set equity to 10, bonds to formula (1-%equity -% Tbill), and change T bill from 10% to 80% (8 combinations), add more column, then change equity from 10 to 20, repeat those step (around another 7 scenarios), repeat until equity to 50%. Total should be 50 combinations tested, see if you achieve similar or close return metrics trade off with any lower equity mix. If you found it, it means there is no right or wrong answer, both the low and high equity mix achieve the same return/risk trade off. 

If I choose the higher one, I will argue based on 2nd and 3rd objectives to achieve best return possible. 

If I choose the lower one, I will argue based on 1st and 4th objectives. too be conservative

[azhex...@gmail.com]

Sorry guys, what have you written as recommendations for risk/return requirements? I have recommendations regarding asset mixes (like, no more than 50% in equities, etc.), but I'm not sure that's what the questions asks...

[Matthew Rashford]

I included different caps for equities in each of the market scenarios.  For example, I suggested 25% equities in the optimistic market scenario since I would expect them to perform better and would be willing to accept more risk.  Then I adjusted Treasuries and bonds from there.

[azhex...@gmail.com]

I see. Thank you!

I guess, what bothered me is that it isn't a risk/return requirement per se. But maybe I'm just overcomplicating it.

[zipzip]

I have failed this bad boy 3 times...mostly because of task 2, I think. I don't know how much help this is, but here's the advice I've gathered from others who have passed this. 

-Sharpe's ratio isn't really applicable here. 

-Keep your risk/return metrics simple..the SOA isn't trying to award creativity so just focus on picking something and being able to back it up. 

-To keep your requirements from being arbitrary, tie them back to the CDEF's objectives. 

[deezydowntown]

So do you think we just need like limits of the metrics we are given?  You don't think we need to create another figure that meshes them all together? 

[duda.m...@outlook.com]

I've gotten mixed advice on that. For all of my prior attempts, I tried creating a new metric that blends two of the metrics we were given. To be honest, I don't think I failed because I did that, but this time, I'm just picking two of the given metrics and giving limits. I'm not sure there's a right answer, but I know I struggle with writing up justifications and that's why I'm taking the simple route.  

[azhex...@gmail.com]

it makes sense, but how do you then select the optimal portfolio? if you say, for example, that mean should be between 700 and 800, and CTE < 900, i would assume there are multiple portfolios satisfying these criteria?

but i agree with you that justifications are probably more important than the actual metric choice.

[azhex...@gmail.com]

thanks for advice!

[Matthew Rashford]

Decide on your risk and return requirements and justify your recommendations. There is no right answer. Determine what you want to do. For me, I gravitated towards the taxpayers. In order for them not to overcharged, the investment portfolio has to perform. What level of risk are you willing to take?

[Surin Patel]

How did you all approach the 2nd and 3rd questions in this task?

In the 2nd question, we're asked to create requirements based on the given risk/return metrics.

In the 3rd, we're asked to use those metrics to determine an optimal asset mix to meet those.

Isn't the only way to determine requirements first by playing around with different asset mixes, and then seeing what requirements would be reasonable? I ask because the order of the 2 questions makes it seem like we're working in the order opposite of what makes sense. Any thoughts?