Seeking diversification through efficient portfolio construction using cash-based and derivative instruments

M. W. Jones

British Actuarial Journal, 2014, vol. 19, issue 2, 468-498

Abstract: Diversification across asset classes has declined markedly in the last decade and concerns abound about the ability (or lack) of the financial system to weather another 2008-like event. There is a growing volume of academic literature seeking to derive measurement variables for detecting systemic risk. There is clearly a role for the actuarial profession within this discussion and we hope that this paper can engender further discussions and papers on this specific issue. Just as diversification across conventional asset classes has decreased there has been greater attention paid to the broader array of potential investment strategies that can be accessed via derivatives. The paper explores the prudent management of derivatives in pension funds and general asset portfolios to improve portfolio efficiency both in terms of implementing investment strategies and in broadening the range of investment opportunities for building an efficient investment portfolio from a risk-based perspective.

Date: 2014
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