Characteristics of Liabilities Relevant to Asset Allocation
Aside from the well-known asset-only approach to asset allocation, other options are available to financial professionals. Another lens to view asset allocation involves thinking not of an already constructed portfolio of assets but first viewing the liabilities under the portfolio’s…
Rebalancing Asset Portfolios
Rebalancing as a Discipline After choosing a strategic asset allocation, portfolios will drift away from those allocations as market conditions change and affect the relative weights of investments within a portfolio. One choice is clearly to ‘do nothing,’ also known…
Economic Balance Sheet
The Economic Balance Sheet An economic balance sheet is a snapshot in time of an investor’s assets and liabilities. But rather than just capturing physical and/or financial assets, as does the traditional balance sheet, the economic balance sheet also…
Forecasting Fixed-income Returns
To inform the asset allocation process and adequately set client expectations, analysts must be able to create realistic and defensible forecasts for all asset classes, including fixed income. The main ways to approach forecasting fixed-income returns include: Discounted cash flow:…
Monetary and Fiscal Policy on Business Cycles
Monetary Policy To smooth out extreme inflation or deflation, central banks act as mediators. It is generally accepted that expansionary policies are less effective than those that are restrictive. In other words, it’s easier for governmental authorities to cool down…
Business Cycles and Short-and Long-term Expectations
The business cycle refers to variations of economic productivity–often measured in terms of GDP–around its long-term trend rate. It is this long-term trend rate that serves as an anchor for forecasting business environments. This is because the economy cannot sustainably…
Challenges in Developing Capital Market Forecasts
Inappropriate capital market expectations could be devastating to portfolio performance. Several pitfalls could lead to false expectations and a less-than-optimal asset allocation. Regardless, the analyst is tasked with following a disciplined process and understanding potential challenges in developing capital market…
Common Behavioral Biases
Mnemonic Devices for Easy Recall Cognitive: The cognitive biases can be remembered with the following mnemonic device: Con-Con-Con-Rep-Hind + FAMA (think Fama and French). Emotional: The emotional biases can be remembered with the following mnemonic device: LESSOR (the owner of…
Operational Resilience: Impact Tolerance for Important Business Services
After completing this reading, you should be able to: Describe an impact tolerance; explain best practices and potential benefits for establishing the impact tolerance for a business service. Provide and explain criteria that firms should use to determine their important…
Principles for Operational Resilience
After completing this reading, you should be able to: Define and describe operational resilience and explain essential elements of operational resilience. Explain recommended principles that banks should follow to implement an effective operational resilience approach. In the years following the…
