section 1 - The American College Online Learning Center

c. We need an early-warning system to prepare clients for a dramatic change in thepossibility of a portfolio failure much like blood pressure monitor makes us awareof high blood pressure problems.(1) How do you distinguish between portfolio failure rates and their likelihoodto change?(2) We need a new model that provides a warning sign which signals exposureif market changes occur for the worse.(3) Derivative tells a client how fast something can change. A high derivativenumber means that changes can occur rapidly. This is the thinking behindthe SORDEX stress test.d. Pensions and annuities in a portfolio are less likely to trigger an alarm (they willgive a portfolio a “low” derivative number).(1) The products in the portfolio have an impact.(2) There is nothing wrong with Monte Carlo as a tool. It just needs to beaugmented.(3) How does this system, known as SORDEX, work to monitor the situation?(a) The first analysis should be for the client’s current situation and asecond analysis should be for extreme circumstances.(b) SORDEX is based on the ratio of success in the two analyses.(c) A high SORDEX ratio means the planner should monitor the clientmore frequently.• A big problem for planners is how frequently to meet witheach client.• Should meet more frequently with those at high risk andless frequently with those at low risk• The SORDEX ratio provides both an early warning systemand a method of prioritizing.(d) If excess sensitivity exists, a reallocation of assets may bewarranted to give a high sustainability.• Clients should consider more guaranteed products.• There is never one unique asset allocation. There are lotsof acceptable ones.• Choosing a method to get an acceptable sustainabilityratio means finding the method most likely to work underextreme circumstances (creating a high sustainability thatdoes not change).• This certainly means some form of an annuity.• The goal is a high sustainability that will not changesdramatically in a short period of time.e. When talking about portfolio failure, there are really two issues(1) Probability of failure(2) Magnitude of failure(3) An annuity with lifetime guarantees is not the only solution. Structureproducts are offered by:(a) Insurance companies7.31