“LINKING PENSION LIABILITIES TO ASSETS” THE CANDIDATE SHOULD BE AB...

26. “Linking Pension Liabilities to Assets” The candidate should be able to: a) contrast the assumptions concerning pension liability risk in asset-only and liability-relative approaches to asset allocation; b) discuss the fundamental and economic exposures of pension liabilities and identify asset types that mimic these liability exposures; c) compare pension portfolios built from a traditional asset-only perspective to portfolios designed relative to liabilities and discuss why corporations may choose not to fully implement the liability mimicking portfolio. 2008 Level III Guideline Answers Morning Session – Page 13 of 40 Question: 4 Topic: Portfolio Management – Asset Allocation Minutes: 17 Guideline Answer: PART A i. Given Thurlow’s return requirement of 9.4%, corner portfolios #3 and #4 are the two most appropriate portfolios to combine. In addition to achieving the return requirement, the combination of portfolios #3 and #4: