IPS quiz liability, employees, protection, advantages, benefit

DarienHacker

what is fixed horizon strategy ? advantages and disadvantages?
what is lifestyle protection strategy? what is cash flow matching strategy? disadvantages?
what is liability risk? what is liability noise?which kind employees are hardest to hedge the benefit risk?

Analyze_This

Reading 18: Fixed Horizon strategy pertains to goals-based investing. Just simply buy a zero bond matching your minimum required future liabilities. The rest may be invested in an aggressive sub-portfolio which must not jeopardize the desired horizon minimum value. (For this sounds similar to a portfolio with e.g. 30/70 cash/equity allocation, only that cash does not earn a return and has no duration).

Advantage: can protect lifestyle goal (children education, purchase home.....)
Disadvantage: Horizon must be known and zero coupon bond available that matches horizon date. Zero bonds have also market value risk. Low return of a zero bond....etc.

Liability risk has probably something to do with the uncertainties surrounding the exact determination of the PV of liabilities either from actuarial assumptions or changes in market rates that lead to changes in the PV of liabilities.

no clue about the rest (what is liability noise?which kind employees are hardest to hedge the benefit risk?)

NakedPuts2011

Liability noise:

- plan, demographic experience differently from the actuary's model given that the underlying probabilities are certain
- Model uncertainty: the underlying probability is not certain

The active employees have largest liability noise(hardest to hedge):
- Their mortality assumption is less accurate
- Their benefit payments are embedded with assumption of withdrawl, disability and retirement and are embedded with a large amount of uncertainty, much more so than those of retirees or deferreds

For retirees, liability noise include:
- mortality asumption about the length of people's lives and the duration they will receive benefits

For deferred, liability noise include:
- longevity risk
- when the participant will retire and start receiving benefits

Windjammer

ROGER1982 Wrote:
-------------------------------------------------------
> Liability noise:
>
> - plan, demographic experience differently from
> the actuary's model given that the underlying
> probabilities are certain
> - Model uncertainty: the underlying probability is
> not certain
>
> The active employees have largest liability
> noise(hardest to hedge):
> - Their mortality assumption is less accurate
> - Their benefit payments are embedded with
> assumption of withdrawl, disability and retirement
> and are embedded with a large amount of
> uncertainty, much more so than those of retirees
> or deferreds
>
> For retirees, liability noise include:
> - mortality asumption about the length of people's
> lives and the duration they will receive benefits
>
> For deferred, liability noise include:
> - longevity risk
> - when the participant will retire and start
> receiving benefits

Could you post the source of it? CFA Book No, SS, Reading, Page?
Thx

wake2000

Mr Anderson- check SS5