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Risk analysis of triple AAA bonds compared to a globally diversified stock portfolio
RiskCo is a young and dynamic company that develops software products for and in collaboration with financial organizations. Our R & D department is looking for an enthusiastic intern who has an academic background in actuarial science, econometrics, financial economics, computer science or mathematics and who is interested in solving the following problem:
Pension funds have to work with an interest rate to value the future claims of their clients. This interest rate needs to be equal to the return of the wealth. Before the introduction of the FTK (financieel toetsingskader) a 4% fixed interest rate was used, in fact an arbitrary value that was assumed to be sufficient. In the present situation, however, pension funds have to work with an interest rate based on the term structure, which is supposed to be risk free. At the moment, the interest rate is historically low, thus creating a problem for the pension funds. In contrast, the stock market is flourishing. The question that now arises is whether a pension fund can reduce its risk and increase its yield by spreading its capital over a broad range of worldwide stocks. It is widely accepted that the long-term yield of a worldwide stock portfolio performs much better than an AAA-rated fixed income portfolio. How can we compare the risk of an AAA-rated bond with a globally diversified stock portfolio? What is the effect of inflation? This MSc project wants to answer these challenging questions by modeling bond and stock portfolios using the software ProductXpress. For a reference, see: Bodie, Z., Kane, A., Marcus, A. – Investments, vol. 1/2 – 5th Edition (2003).
Candidates worldwide are welcome to apply for this internship.