Poor solution - Sept 2014q3 (V)

Discussion in 'SA5' started by Edwin, Apr 25, 2015.

  1. Edwin

    Edwin Member

    Here the examiners' are getting it wrong....I don't care if I pass but I disagree. If someone's performance is being assessed by Return on Capital alone you have a lot of things to say;-

    1) It is not risk based - the examiners got the point but couldn't go any further
    2) Being not risk based, the manager is incentivised to take risks to get a high ROC, he may...
    3) ...Make excessive returns in some parts of the portfolio and underperform in others or he may even take on basis risk to enhance returns
    4) The risks may accumulate over a period and blow up all gains
    5) The best way is to set a risk appetite for him and reward him only if the ROC is conditional on working within appetite

    The solution by the examiners' is highly missing the point, the point here is "Use the right yardstick, Risk is brewing"....there is no need to conclude by defining Economic Capital!

    But maybe that's the difference between a Risk Actuary and a Finance one (& I'm hoping to be both on Thursday!)
     
    Last edited by a moderator: Apr 27, 2015

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