Estimating the Risk of Guaranteed Products

Abstract

Recent years have witnessed rapid growth in the number of mutual funds products offering guaranteed rates of return. However, such products reduce the degree of operational transparency of funds and simultaneously expose mutual fund companies to the risk of a capital shortfall between the actual return of the fund and the investor's guarantee. This article outlines a bootstrap-based methodology that improves transparency by making explicit to senior management the risks inherent in such products. The authors apply the approach to the problem of describing the risk/return characteristics in a guaranteed average rate of return fund that can invest in U.S. equities and U.S. bonds.

TOPICS: Mutual fund performance, risk management, exchanges/markets/clearinghouses