RSM330H1 Lecture Notes - Lecture 5: Risk Premium, Modern Portfolio Theory, Efficient-Market Hypothesis
Document Summary
Pension funds: two types, defined benefit plans becoming less common. Riskier for sponsor because of obligation of providing future pension, while defined. Are liabilities that must be funded contribution has no risk to the company: pv of liabilities = funding status - market vale of pension plan"s assets. Depends on how well assets are invested and on interest rates. Because rates have been falling, liabilities are increasing. Liabilities have real impact on balance sheet and cash flow. Asset allocation: key points: combine assets with low correlation to increase return and reduce risk, optimal portfolio selection considers investor"s risk tolerance, results are sensitive to inputs, correlations are not stable over time. Institutional investors differ in risk tolerance; risk tolerance affects strategic asset mix. Otpp is more conservative than cppib because they have older liabilities and fewer people paying in: cppib is younger, still has many people paying into paln.
