The Yin and Yang of Risk Assets
Alton Cogert, President & CEO, Strategic Asset Alliance
The Fed’s monetary policies have thrown down the gauntlet. ‘Take more risk’ they say, to help improve the economy. No matter what we may think about Fed policy, we must invest taking it into account. But, how much risk is too much? Or too little? How can your insurer best determine its risk appetite? And, where might you safely look for improved risk adjusted returns?
Key Takeaways | View PDF
- The first building block for how insurers and risk pools allocate towards risk assets should be looking at your organization's 'risk appetite' and how it relates to your financials.
- The greater the percent of surplus that is allocated towards risk assets, the greater the potential losses are in a 'worst case' scenario. The key is deciding as an organization, to what percent of potential loss are you willing to take.
- The only free lunch in investing is 'diversification.' Different assets tend to zig when others zag.
- The second building block is 'correlation' - what direct relationships do the assets in your portfolio have to other assets? Looking at correlation will help your organization find the 'free lunch'
- The 'Efficient Frontier' helps put these building blocks together by identifying the portfolio structures that have the best chance at achieving the optimal combination of risk and return.