Correation matrix/BSCR approach – Oct 2011

[Edwin]

I don’t understand why the examiner’s spoke about a correlation matrix for calculating the diversification benefi, in my attempt I tried to use a correlation matrix and my solution was instead 1.56.

My correlation matrix was;-
[1 0]
[0.25 1]
EC matrix was
[5.5 ]
[2.25]
And I followed the Solvency II BSCR approach;-

sqrt(MMULT( MMULT(TRANSPOSE(EC,Corr),EC))

My final answer was 6.197

1) Could I have gotten some credit or was I just confused?
2) Is it possible to get the same answer as the examiners' by using their suggested "correlation matrix" method?

 

[Edwin]

I don’t understand why the examiner’s spoke about a correlation matrix for calculating the diversification benefi, in my attempt I tried to use a correlation matrix and my solution was instead 1.56.

My correlation matrix was;-
[1 0]
[0.25 1]
EC matrix was
[5.5 ]
[2.25]
And I followed the Solvency II BSCR approach;-

sqrt(MMULT( MMULT(TRANSPOSE(EC,Corr),EC))

My final answer was 6.197

1) Could I have gotten some credit or was I just confused?
2) Is it possible to get the same answer as the examiners' by using their suggested "correlation matrix" method?

Wow, beautiful, beatiful...I got it, it gives exactly the same answer. My correlation matrix above was wrong;-

It should be;-

Corrij;-

[1 0.25]
[0.25 1]

Then the answer is exactly 6.442049 leading to a diversification benefit of 1.31, what a beauty!

 

[Simon James]

Glad you got it to work!