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Set out the risk measures relied on by insurers, pension funds, asset managers, and banks

CFA® Level II · Portfolio Construction · Measuring and Managing Market Risk · L2.PM.5.l

The idea

Different institutions stress different measures. Banks focus on liquidity gaps, leverage, economic capital, VaR on trading books, sensitivities such as the duration of equity, and regulatory stress tests. Traditional asset managers focus on benchmark-relative risk: tracking error, active share, relative VaR, redemption liquidity and scenario losses. Hedge funds using leverage and derivatives stress VaR, drawdown, leverage and sensitivities. Defined benefit pension funds care most about the surplus, assets minus liabilities, so they use surplus at risk, duration mismatch against liabilities and stress tests of the funding ratio. Property and casualty insurers watch catastrophe exposure and asset–liability matching; life insurers watch duration gaps and longevity risk. The trap is judging a pension fund's risk from asset volatility alone.

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