8 top white papers covering Risk Tolerance and Asset Allocation
By "strategic asset allocation" we mean the determination of long-run benchmarks for allocations to different asset classes. This contrasts with "tactical asset allocation", which is the decision to depart from these benchmarks in order to (seek to) add value.
One of the key variables in arriving at a long-run asset allocation is to determine the desired level of "risk tolerance" or "risk appetite". The papers below cover these issues in a variety of contexts including wealth management, DB pensions and insurance asset management. If the precise topic that interests you isn't covered here, then simply use our powerful search functionality above.
Financial Risk Tolerance: A Psychometric Review (CFA Institute Research Foundation, 2017)
This paper from the CFA Institute Research Foundation, positioned primarily in a wealth management context, provides financial planners and other investment professionals with a review of how risk tolerance can be assessed, tested and evaluated.
A Comprehensive Investment Framework for Goals-Based Wealth Management (EDHEC)
This EDHEC report develops a framework that can be used by financial advisors to allow individual investors to optimally allocate assets to categories of risks they face across all life stages and wealth segments so as to achieve personally meaningful financial goals.
Strategic asset allocation reviews for DB plans (Russell Investments, 2016)
This 5-page paper discusses the process for arriving at a strategic asset allocation benchmark in a defined benefit pension scheme.
LDI Implementation - Managing Surplus Volatility by Reducing the Drawdown Risk of Growth Assets (QMA, 2016)
Is it possible for company pension plans to find inventive ways to improve the health and drawdown risk of their DB plans?. This QMA thought leadership piece recommends that sponsors examine firstly the trade-off between surplus volatility and funded status, and explore ways to reduce the surplus volatility of their growth assets.
Long-Term Investing - Portfolio Guide (Savvy "Best Paper" Award Winner 2015)
This paper won the "best paper" accolade in the inaugural Savvy Investor Awards 2015. The paper examines the different elements of a "long-term" approach to investing, including the essential thinking behind the concept of risk appetite.
The Divergence of High- and Low-Frequency estimation (State Street, 2015)
Over what time horizon should "risk" be judged and measured? This paper points out that very different conclusions can be drawn depending on whether high-frequency or low-frequency measures of risk are used.
Insurer Survey 2017: Navigating 'Normalised Uncertainty' (AXA IM, June 2017)
This paper from AXA doesn't say much about how insurers determine their levels of risk tolerance. But the survey results do throw up some interesting insights relating to insurer asset allocations.
Solvency II and Absolute Return Investing (Standard Life, 2016)
The authors explore the ramifications of the Solvency II "look-through" principle, with regard to the calculation of solvency capital needs. The paper highlights the way in which this principle changes how different asset classes are viewed by insurers.