Bharti Singla
Senior Member
IAI Sept 2016 Q1 (ii)
ii) Describe the key risk factors that would affect the change in net asset value over a one year period; and how would the impact of each of these factors vary between net asset value measured on the basis of statutory and realistic balance sheets respectively.
Ans.
Earned investment returns on assets
Whilst considering the impact of this, the investment returns earned on assets need to be measured on a basis that is consistent with the methodology used for the valuation of assets. Thus, in the case of the statutory valuation, the investment return earned would be a combination of book yield (arising on fixed interest securities) and market returns (arising on listed equities), whereas in the case of the realistic valuation, this would be fully based on market returns (i.e. reflecting any unrealised gains/losses).
Thus the impact on the respective NAV positions would be related to the volatility of the investment returns – whereby the statutory NAV may be relatively less volatile than the realistic NAV, particularly in case of movements in bond markets.
A higher than expected actual return would lead to strengthening of both statutory and realistic NAVs.
I did not get why statutory NAV may be relatively less volatile than the realistic NAV??
ii) Describe the key risk factors that would affect the change in net asset value over a one year period; and how would the impact of each of these factors vary between net asset value measured on the basis of statutory and realistic balance sheets respectively.
Ans.
Earned investment returns on assets
Whilst considering the impact of this, the investment returns earned on assets need to be measured on a basis that is consistent with the methodology used for the valuation of assets. Thus, in the case of the statutory valuation, the investment return earned would be a combination of book yield (arising on fixed interest securities) and market returns (arising on listed equities), whereas in the case of the realistic valuation, this would be fully based on market returns (i.e. reflecting any unrealised gains/losses).
Thus the impact on the respective NAV positions would be related to the volatility of the investment returns – whereby the statutory NAV may be relatively less volatile than the realistic NAV, particularly in case of movements in bond markets.
A higher than expected actual return would lead to strengthening of both statutory and realistic NAVs.
I did not get why statutory NAV may be relatively less volatile than the realistic NAV??