April 2008 paper 2 qn 3 (i) the examiner solution says: high exposure to equity risks in these circumstances will increase market risk but equity provides real return, which is matching with the inflation linked benefits to be inflation linked and thus real in nature. how, then, is market risk increased?
I can't download the exam paper but I guess the key is the words 'in these circumstances'. What's the full scenario of the question?
Hi Although equities are expected to provide a real return (over a long period of time, on average), this is not guaranteed and the returns from the equities will not necessarily match inflation. Equity market values are volatile, so will always give market risk to the holder (unless they have liabilities which are precisely matched with the equity market movements). Hope that helps.
