NDLI: Financial planning and risk-return profiles

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Financial planning and risk-return profiles

Content Provider	Springer Nature Link
Author	Graf, Stefan Kling, Alexander Ruß, Jochen
Copyright Year	2012
Abstract	The importance of funded private or occupational old age provision will increase due to demographic changes and the resulting challenges for government-run pay-as-you-go systems. Clients and advisors therefore need reliable methodologies to match offered products and clients’ needs and risk appetite. In this paper, we show that the information provided by existing approaches such as sample illustrations and historical backtesting that are often used for comparing and explaining products is often insufficient or even misleading. We introduce an alternative methodology based on risk-return profiles, i.e. the (forward-looking) probability distribution of benefits. In a model with stochastic interest rates and equity returns including stochastic equity volatility, we derive risk-return profiles for various types of existing unit-linked/equity-linked products with and without embedded guarantees. In contrast to previous work, we particularly take into account charges, effects resulting from regular premium payments and typical practical restrictions like borrowing constraints, hence providing applicable models adding insights to current political discussions on transparency regulations in several countries. We highlight the differences between actual product characteristics and the impression generated by existing approaches and explain the resulting misleading incentives for product developers and financial advisors.
Starting Page	77
Ending Page	104
Page Count	28
File Format	PDF
ISSN	21909733
Journal	European Actuarial Journal
Volume Number	2
Issue Number	1
e-ISSN	21909741
Language	English
Publisher	Springer-Verlag
Publisher Date	2012-06-14
Publisher Place	Berlin, Heidelberg
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Stochastic modelling Financial planning Product comparisons Applications of Mathematics Quantitative Finance Game Theory, Economics, Social and Behav. Sciences Finance/Investment/Banking
Content Type	Text
Resource Type	Article
Subject	Statistics and Probability Economics and Econometrics Statistics, Probability and Uncertainty

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1	Ministry of Education (GoI), Department of Higher Education	Sanctioning Authority	https://www.education.gov.in/ict-initiatives
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3	National Digital Library of India Office, Indian Institute of Technology Kharagpur	The administrative and infrastructural headquarters of the project	Dr. B. Sutradhar bsutra@ndl.gov.in
4	Project PI / Joint PI	Principal Investigator and Joint Principal Investigators of the project	Dr. B. Sutradhar bsutra@ndl.gov.in Prof. Saswat Chakrabarti will be added soon
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