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Extreme Events – Specimen Question A.5.1(c) – Answer/Hints

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Q. In what circumstances might a mixed minimum risk portfolio as per (b) apply? Give examples of the types of asset that might then be A1 and A2.

 

The most obvious circumstance is where we are investing a portfolio with liabilities that do not look much like cash. For example, a pension fund might have liabilities that are partly fixed in nature (but payable many years into the future) and partly inflation-linked. A suitable minimum risk portfolio might then be a suitable mixture of fixed interest securities and index-linked securities.

 


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