Hi I am working through this question but have become a bit stuck on deriving an assumption for equity returns in part (iii). I am not sure how to use the information given. If dividend yields are unchanged would we just use the same assumption as per the previous year? Thanks
Also, in part (iv) where we have to estimate the mv of assets at the y/end, how would you do this for the bond holdings? All I can think is that if the yield has decreased by 0.25% the price must have increased by a similar percentage.
Hi Ali10 With regards to your first question, you are right, that it would also be acceptable to assume the return on equity is unchanged (and indeed credit would be given for this under the third point in the solution). As for your second question - if the yield drops by 0.25% per annum, then the price of the asset increases by 0.25% x duration of the asset or 1.0025 ^ duration of the asset. Here the duration of the asset is taken to be 15 years, so a 0.25% drop in yield would lead to a price increase of about 1.0025^15 or .25% x 15 which is approx 3.8%. (This is given credit in the 4th point in the solution.) I hope this helps. Best wishes Stuart Stuart Underwood ActEd Tutor
