The Yin and Yang of Risk Assets - SAA I
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The Yin and Yang of Risk Assets March 17th, 2021 Mr. Alton Cogert, CFA, CPA, CAIA, FDP, CGMA President & CEO
Transcript of The Yin and Yang of Risk Assets - SAA I
The Yin and Yang of Risk Assets
March 17th, 2021
Mr. Alton Cogert, CFA, CPA, CAIA, FDP, CGMA
President & CEO
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What are your insurer's risk asset investments?
ⓘ Start presenting to display the poll results on this slide.
The Yin and Yang of Risk Assets
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Yin Yang
Receptive
Winter
Disorder
Risk
Active
Summer
Order
Reward
Risk Reward
Diversifier that can improve risk adjusted return
Role of Risk Assets
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Can be overdiversified (5% heuristic)
Downside can be vicious and timely, resulting in decreased surplus
Can be over valued Higher investment income (sometimes)
Upside results in increased surplus
Sources of Risk Sources of Reward
Dividends or interest
Capital gains
Mean reversion (if under valued)
Drawdown and Volatility
Capital losses
Mean reversion (if over valued)
Sources of Risk and Reward
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Building Block #1: Risk Appetite
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Assuming the previous slide is your insurer, what % of Surplus is your Risk Appetite?
ⓘ Start presenting to display the poll results on this slide.
1990 Nobel Prize in Economic Sciences
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⚫ Different assets zig when others zag
⚫ Correlation statistic: -1 to +1
o Plus 1: Perfect direct relationship
o Minus 1: Perfect inverse relationship
o Zero: No relationship
⚫ Investment grade bonds are highly correlated with each other
⚫ Risk assets not as highly correlated to IG bonds or many other risk assets
⚫ But, what does that ‘Free Lunch’ of Diversification look like?
Diversification: “The Only Free Lunch in Investing”
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Building Block #2: Correlations
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Building Block #2: Return and Risk Assumptions
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Putting it Together: Risk Appetite
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Please Remember
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The Yin and Yang of Risk Assets
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Yin Yang
Receptive Active
Winter Summer
Disorder Order
Risk Reward
Risk Appetite Efficient Frontier
