Risks Facing Investors in the Article, Can We Keep Our Promises?” by Robert D. Arnott

Risks Facing Investors in the Article, Can We Keep Our Promises?” by Robert D. Arnott

Length: 1677 words (4.8 double-spaced pages)

Rating: Strong Essays

Open Document

Essay Preview

Can We Keep Our Promises?

The purpose of this paper is to provide a summary of the article called “Can We Keep Our Promises?” by Robert D. Arnott, and to help better understand the three key risks facing each investor.

Robert Arnott describes risk and return as “having two sides of the same coin” meaning risk is inseparable from return. Arnott points out the most important risks that are faced by managers of company pension plans: underperforming other corporate pension funds (their peers), losing money (mostly associated with portfolio standard deviation or volatility), and underperforming the values of pension obligations and therefore losing actuarial ground. He defines each of these risks as well as giving a few examples on each one. He quickly jumps into how many tend to focus on standard deviation as the only a single metric calculation, rather than recognizing there are other ways to do so. The author discourages the focus on just one risk, because all are intertwined together and rely on one another.

By focusing on only one risk, for example peer risk, it leaves the company up for even more risk in its assets and pension obligations. Figure 1 illustrates that these risks do indeed rely on one another. When investors try to only minimize one of the risks (small circles) stockholders leave themselves open / exposed to the other two scopes of risk: Beta and Matching (ALM).

Understanding Risk

Similar to what the article states, we have seen that risk is something that can go wrong, which we are unaware until a crisis happens. Many people tend to ignore the short tails of distribution saying they don't matter because there's a low possibility that it will occur. Think back to one such “perfect storm” that happened back in ...


... middle of paper ...


...f assets to liabilities is also known as “liability-driven investing” or LDI. LDI is a form of investing in which the main goal is to gain sufficient assets to meet all liabilities, both current and in the future. This type of investing is most prominent with defined-benefit pension plans whose liabilities can often reach into the billions of dollars for the largest of plans. Typical LDI strategies involve hedging the fund's risk to the changes in interest rates and inflation.

Conclusion

Arnott comments on how investors should balance these risks to better understand the health of their company, or at least strive to manage two of the three. As talked about recently in class, I believe all focus should be pointed towards matching assets to liabilities because the safety accomplished through ALM opens up opportunities for increasing the companies net worth. I would

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

A Strong Campaign For International Investors Essay

- Introduction Egypt has been a relatively stable investment destination prior to the recent Egypt Spring that has caused political instability in the country. The current instability has contributed to investors shying away from investing in this country due to flawed perception of the image painted by international media. It is imperative for the country to create a strong campaign for international investors to continue investing in the country despite prevailing political instability in some regions....   [tags: Government, Public policy, Economic efficiency]

Strong Essays
1228 words (3.5 pages)

An Analysis of Komanuyakaa Facing It Essay

- An Analysis of Facing It     Yusef Komanuyakaa's poem "Facing It" is a brutal examination of the affects that war leaves upon men. The reader can assume that Komanuyakaa drew upon his own experiences in Vietnam, thereby making the poem a personal statement. However, the poem is also a universal and real description of the pain that comes about for a soldier when remembering the horror of war. He creates the poem's persona by using flashbacks to the war, thereby informing the reader as to why the speaker is behaving and feeling the way he is....   [tags: Komanuyakaa Facing It Essays]

Strong Essays
996 words (2.8 pages)

Investors and Hedge Funds Essay

- Are hedge funds suitable for retail investors. There are many different reasons that mankind save and invest for. Generally, pension fund is the best choice for investors who are not keen to take risks. The pension fund is by far the highest number of investment that is low risk for many people. However, the pension fund is low return as well. “At annuity rate 8% of per annum (p.a.), a pension of £20,000 a year requires a pension fund of £250,000” (Redhead, 2008:1). In 1949, the first hedge fund was created by Alfred Jones....   [tags: Business, Investment]

Strong Essays
1911 words (5.5 pages)

Comparative Article Review: The Great Depression Essay

- Two articles written about the Great Depression, one by James Struthers and the other by John Manley, each article takes a different view on the depression. One is looking exclusively at the politics and the other looking a public organizations and party formations, each showing a fear of foreign ideals. All of this would shape the way in which the working and middle class would look at and provide input into future governments. Let’s look at the differences first, James Struthers you can see by title alone that this article is on the unemployment policy and will look at the government and the Prime ministers of the 1930’s....   [tags: Article Review]

Strong Essays
1566 words (4.5 pages)

Myth of the Teen Brain: An Article Review Essay

- Introduction In 2007, Scientific American Mind published an article by Robert Epstein. In his article, Epstein raised the question of whether the teenage brain caused turmoil, or if turmoil shaped the brain. The author began by explaining a discredited theory that haunts teenagers today. It began in 1904 with G. Stanley Hall’s observation of adolescents who were left on the streets due to mass migration and immigration during the industrial revolution. Hall attributed the turmoil he observed to recapitulation, a biological theory in which adolescence mirrors the "savage, pigmoid" stage of evolutionary development (Epstein 2007)....   [tags: Article Review]

Strong Essays
1235 words (3.5 pages)

Nostalgic Memories In Yusef Komunyakaa's Facing It Essay

- Nostalgic Memories In 'Facing It' Just as farmers brand their livestock in order to claim them as their own, humans do the same when it comes to important events. There are certain moments in one's life when an incident is so powerful, emotionally or physically, that it leaves a mark on a person forever. The branded symbol that is left could be positive or negative, but there is no doubt that it has caused a wave of all-encompassing feeling. And although when looking back at the past the majority of our memories tend to be viewed with a black and white perception, it is these rare occurrences when a certain event can be so distinct that it is like experiencing it once more....   [tags: Facing It Poetry Poem]

Strong Essays
1508 words (4.3 pages)

Essay on Article Review: Why Age Matters

- Summary of Article: Why Age Matters in the Work Preferences of Public Employees was an interesting journal article that discusses the challenges involved with employing individuals that vastly range in age. With organizations concentrating on age diversity, they are employing individuals that were born in different generations, and range in age from young to retirement age. The challenge for management is that each generation has different goals and expectations from their employer, and management is unable to treat all of these generational groups the same way....   [tags: Article Review]

Strong Essays
846 words (2.4 pages)

Falling Behind by Robert Frank Essay

- Robert H. Frank’s book Falling Behind is a short, lucid, and compelling account of what is going on with the middle class”(Alexander Kemestrios Ben). That is what one reviewer on Amazon.com commented about Frank’s book Falling Behind: How Rising Inequality Harms the Middle Class. In order to engage readers and support their ideas, most argumentative nonfiction books use statistics, logical reasoning, personal anecdotes, and real-life examples. While all of these strategies such as should make an interesting and compelling argument, the question is not of how interesting the book is, but rather is it or is it not a quality argumentative nonfiction book....   [tags: Falling Behind, Robert Frank]

Strong Essays
2328 words (6.7 pages)

Essay on Robert Elliot's Faking Nature

- Robert Elliot's "Faking Nature" ABSTRACT: Robert Elliot's "Faking Nature," (1) represents one of the strongest philosophical rejections of the ground of restoration ecology ever offered. Here, and in a succession of papers defending the original essay, Elliot argued that ecological restoration was akin to art forgery. Just as a copied art work could not reproduce the value of the original, restored nature could not reproduce the value of nature. I reject Elliot's art forgery analogy, and argue that his paper provides grounds for distinguishing between two forms of restoration that must be given separate normative consideration: (1) malicious restorations, those undertaken as a means of ju...   [tags: Argumentative Persuasive Faking Elliot Essays]

Strong Essays
3144 words (9 pages)

Essay on Robert Wrights Article "the Evolution Of Despair"

- Robert Wright's Article "The Evolution of Despair" Robert Wright is the science writer for Time Magazine. Because he writes for this popular magazine, he enjoys the attention of many readers who look to him to provide them with the latest news from the scientific community. After reading The Evolution of Despair, an article written by Wright, I came under the impression that he is both reporter and commentator, but not explicitly so. Wright utilizes a variety of rhetorical tools to establish trust and confidence in his readers, thereupon interjecting his own opinions without arousing suspicion....   [tags: essays research papers fc]

Free Essays
841 words (2.4 pages)