medium · Frm Part 2 Risk & Investment Management
If a pension plan increases its allocation to long-duration bonds, which of the following changes is most likely to occur in the Surplus-at-Risk (SaR) calculation for a plan with long-duration liabilities?
- The SaR will automatically decrease because bonds have lower standalone volatility than equities.
- The correlation ρ_AL will increase, potentially lowering SaR despite higher asset volatility.
- The hedge term will become positive, increasing the total surplus variance.
- The liability volatility σ_L will decrease because the assets are now safer.
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