Liquidity Risk Reporting and Stress Testing
After completing this reading, you should be able to: Identify best practices for the reporting of a bank’s liquidity position. Compare and interpret different types of liquidity risk reports. Explain the process of reporting a liquidity stress test and interpret…
Insurance Companies and Pension Plans
After completing this reading, you should be able to: Describe the key features of the various categories of insurance companies and identify the risks facing insurance companies. Describe the use of mortality tables and calculate the premium payment for a…
The Blockchain Revolution: Decoding Digital Currencies
After completing this reading, you should be able to: Explain how a blockchain-based cryptocurrency system works and compare cryptocurrencies to conventional money and payment systems. Describe elements of a decentralized finance structure, including smart contracts, tokenized assets, decentralized autonomous organizations,…
The Future Monetary System
After completing this reading, you should be able to: Identify and describe the benefits and limitations of crypto and decentralized finance (DeFi) innovations. Describe the role of stablecoins in DeFi ecosystems and differentiate among the types of stablecoins. Discuss possible…
Future Value and Exposure
After completing this reading you should be able to: Describe and calculate the following metrics for credit exposure: expected mark-to-market, expected exposure, potential future exposure, expected positive exposure and negative exposure, effective expected positive exposure, and maximum exposure. Compare the…
Heuristic and other Approaches to Asset Allocation
Heuristics, also known as rules of thumb, are simplistic and generic rules that investors use to satisfice. Satisficing, as covered in the behavioral economics section, reflects an attempt to reach a satisfactory economic decision at the expense of an optimal…
Factors Affecting Rebalancing Policy
In rebalancing, securities within a portfolio are adjusted based on their relative weights. Disciplined rebalancing tends to reduce risk while incrementally adding to returns. Interpretations of this empirical finding include the following: Rebalancing earns a diversification return, in that rebalancing…
Absolute and Relative Risk Budgets
Risk budgeting is a means of making optimal use of risk to pursue return. A risk budget is optimal when the ratio of excess return to marginal contribution to total risk (MCTR) is the same for all assets in the…
Asset Allocation Relative to an Investor’s Economic Balance Sheet
An economic balance sheet differs from a traditional balance sheet as it includes tradable financial assets and non-tradable extended assets and liabilities. Extended assets often include the relatively large values of residential real estate and the present value of human…
Mean-Variance Optimization – an Overview
Mean-variance optimization (“MVO”) forms the foundation for most modern asset allocation methods. MVO works by shifting the weights of asset classes within a portfolio until an optimal mix is found. An optimal mix is found when the portfolio has the…
