NO.PZ202212280100002102
问题如下：
Welch explains to Finnegan that she is currently following an
asset-only (AO) approach to strategic asset allocation. He strongly advises her
to adopt an asset/liability management (ALM) approach.
B. Discuss three reasons, based on Finnegan’s circumstances, why an ALM approach would be more appropriate than an AO approach.
选项：
解释：
The ALM approach focuses asset allocation on funding liabilities. Finnegan should adopt an ALM approach because:
Finnegan faces a significant penalty for not meeting her liabilities. If she misses her mortgage payments for three or more months, she risks losing her home. She does not want to sell assets to pay the mortgage. Therefore, a portfolio structure designed to meet liabilities would be appropriate.
Finnegan has below average risk tolerance while unemployed. Loss averse investors, or investors with below-average risk tolerance, are better suited to an ALM approach than to an AO approach.
Finnegan’s mortgage payments are interest-rate sensitive. Holding investment assets with similarly sensitive cash flows would hedge this risk. Therefore, an ALM approach is more appropriate than an AO approach for her.
a) The first advantage is that the ALM approach can better match liability with assets. ALM approach explicitly takes liability into consideration, while AO approach cares only about the asset value. Because Finnegan will face fatal results, including losing her home, if she fails to pay for her mortgage, ALM approach suits her better by appropriately matching liability with assets.
b) The second advantage is that the ALM approach generate less risky asset allocation. Because ALM approach tends to allocate more assets to fixed income assets, the generated portfolio has lower volatility and suits better for risk-averse investors and those who has low risk tolerance. Because Finnegan has below average risk tolerance without her job, she should consider ALM approach.
c) The third advantage is that the ALM approach works well for managing interest rate sensitive liabilities. By matching interest rate sensitive liabilities with interest rate sensitive assets, ALM approach can make sure that the value of liabilities matches with that of assets even when interest rate changes. Because mortgage is a kind of interest rate sensitive liability, Finnegan should choose ALM approach.
