My first reaction is that, even if we were to agree that a risk-adjustment
based upon observed variation is preferable to one based on variation
estimates, I don't know how much it helps. The reason is that our primary
targets for risk-adjusted discount rates, loss reserves, aren't traded in
markets in a way that would allow us to track the volatility in the same way
that the volatility of observed asset returns can be tracked.
Dan Roth
----------
From: GMeyers@iso.com
To: Roth,Daniel G.; casnet@lists.casact.org
Subject: Risk Adjusted Rates of Return
Date: Thursday, April 23, 1998 5:28PM
On page C1 of the March 20 Wall Street Journal, there is an article
about M-Squared - a risk adjusted rate of return. The M-Squared refers
to grandfather/granddaughter team with the names Monigliani. One member
of the team was awarded the Nobel Prize in Economics, the other member
currently works for Morgan-Stanley.
What M-Squared does is it "allows investors to analyze a bunch of
disparate as if they had all shown the same volatility. It does that by
hypothetically blending shares of a volatile fund with cash" to match
the "S&P 500's volatility."
Now I have always been suspicious about many of the various methods of
finding risk-adjusted discount rates. I prefer observable rates. This
strikes me as being different in that the formula for determining this
seems explicit (I did not check any references, I just read the WSJ
article.), and the components are observable.
I would like to hear what others think of this approach. Would this
approach be superior to the various risk adjustments that we all know
and (perhaps) love?
Glenn Meyers
Insurance Services Office, Inc.
Internet: gmeyers@iso.com
Voice:(212) 898-5938
Fax: (212) 898-6060
Visit the CAS Web Site at http://www.casact.org
===============================================
To subscribe or unsubscribe from CASNET:
Send an e-mail to caslists@lists.casact.org
Type in the body join casnet to subscribe
or leave casnet to unsubscribe.
------ =_0_MIME_Boundary_11844.355710cb.sch1p121.cna.com
Content-Type: application/octet-stream; name="winmail.dat"
Content-Transfer-Encoding: base64
Content-Disposition: attachment; filename="winmail.dat"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------ =_0_MIME_Boundary_11844.355710cb.sch1p121.cna.com--
Visit the CAS Web Site at http://www.casact.org
===============================================
To subscribe or unsubscribe from CASNET:
Send an e-mail to caslists@lists.casact.org
Type in the body join casnet to subscribe
or leave casnet to unsubscribe.