&KDSWHU
IURP WKH SRLQW HVWLPDWH WKH LQYHVWRU FDQ DVVHVV WKH ULVN RI HYHU\ DVVHW DQG WKXV FRPSDUH LQYHVWPHQW RSSRUWXQLWLHV LQ WHUPV RI WKHLU ULVNV DV ZHOO DV WKHLU H[SHFWHG UHWXUQV $V +DUU\
0DUNRZLW]VKRZHGQHDUO\DKDOIFHQWXU\DJRLQKLV1REHO3UL]HZLQQLQJZRUNRQSRUWIROLRWKHRU\
LQYHVWRUV FDUH DERXW DYRLGLQJ ULVN DV ZHOO DV VHHNLQJ UHWXUQ 3UREDELOLVWLF IRUHFDVWV HQDEOH LQYHVWRUVWRTXDQWLI\WKHVHFRQFHSWV
7KH/RJQRUPDO'LVWULEXWLRQ
,Q WKH ORJQRUPDO PRGHO WKH QDWXUDO ORJDULWKPV RI DVVHW UHWXUQ UHODWLYHV DUH DVVXPHG WR EH QRUPDOO\GLVWULEXWHG$UHWXUQUHODWLYHLVRQHSOXVWKHUHWXUQ7KDWLVLIDQDVVHWKDVDUHWXUQRI LQDJLYHQSHULRGLWVUHWXUQUHODWLYHLV
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
)RUHFDVWLQJ:HDOWK9DOXHVDQG5DWHVRI5HWXUQ
8VLQJWKHORJQRUPDOPRGHOLWLVIDLUO\VLPSOHWRIRUPSUREDELOLVWLFIRUHFDVWVRIERWKFRPSRXQG UDWHVRIUHWXUQDQGHQGLQJSHULRGZHDOWKYDOXHV:HDOWKDWWLPHn DVVXPLQJUHLQYHVWPHQWRIDOO LQFRPHDQGQRWD[HVLV
:KHUH
Wn 7KHZHDOWKYDOXHDWWLPHn W0 7KHLQLWLDOLQYHVWPHQWDWWLPH
r1, r2, etc. 7KHWRWDOUHWXUQVRQWKHSRUWIROLRIRUWKHUHEDODQFLQJHQGLQJDWWLPHV DQGVRIRUWK
=
+
+
+
n n
W W r r r
7KHFRPSRXQGUDWHRIUHWXUQRUJHRPHWULFPHDQUHWXUQRYHUWKHVDPHSHULRGrGLV
%\DVVXPLQJWKDWDOOrnYDOXHVDUHORJQRUPDOO\GLVWULEXWHGZLWKWKHVDPHH[SHFWHGYDOXHDQG VWDQGDUGGHYLDWLRQDQGDUHDOOVWDWLVWLFDOO\LQGHSHQGHQWRIHDFKRWKHULWIROORZVWKDWWn DQGrG DUH ORJQRUPDOO\ GLVWULEXWHG ,Q IDFW HYHQ LI WKH rn YDOXHV DUH QRW WKHPVHOYHV ORJQRUPDOO\
GLVWULEXWHG EXW DUH LQGHSHQGHQW DQG LGHQWLFDOO\ GLVWULEXWHGWn DQG rG DUH DSSUR[LPDWHO\
ORJQRUPDO IRU ODUJH HQRXJK YDOXHVRIn 7KLV ³FHQWUDOOLPLW WKHRUHP´ PHDQV WKDW WKH ORJQRUPDO PRGHOFDQEHXVHIXOLQORQJWHUPIRUHFDVWLQJHYHQLIVKRUWWHUPUHWXUQVDUHQRWZHOOGHVFULEHGE\
DORJQRUPDOGLVWULEXWLRQ
&DOFXODWLQJ3DUDPHWHUVRIWKH/RJQRUPDO0RGHO
7RXVHWKHORJQRUPDOPRGHOZHPXVWILUVWFDOFXODWHWKHH[SHFWHGYDOXHDQGVWDQGDUGGHYLDWLRQ RIWKHQDWXUDOORJDULWKPRIWKHUHWXUQUHODWLYHRIWKHSRUWIROLR7KHVHSDUDPHWHUVGHQRWHGm DQGs UHVSHFWLYHO\FDQEHFDOFXODWHGIURPWKHH[SHFWHGUHWXUQmDQGVWDQGDUGGHYLDWLRQsRIWKH SRUWIROLRDVIROORZV
:KHUH
rG 7KHJHRPHWULFPHDQUHWXUQ
Wn 7KHHQGLQJSHULRGZHDOWKYDOXHDWWLPHn W0 7KHLQLWLDOZHDOWKYDOXHDWWLPH
n 7KHLQFOXVLYHQXPEHURISHULRGV
§ ·
=¨ ¸ −
© ¹
n
n G
r W W
:KHUH
OQ 7KHQDWXUDOORJDULWKPIXQFWLRQ
μ
§ ·= + −¨ ¸
© ¹
OQ m s
σ μ
ª § · º
= ««¬ +¨© + ¸¹ »»¼
OQ s
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
*LYHQWKHORJDULWKPLFSDUDPHWHUVRIDSRUWIROLRm DQGsDWLPHKRUL]RQnDQGWKH]VFRUHRID SHUFHQWLOH z WKH SHUFHQWLOH LQ TXHVWLRQ LQ WHUPV RI FXPXODWLYH ZHDOWK DW WKH HQG RI WKH WLPH KRUL]RQWnLV
6LPLODUO\WKHSHUFHQWLOHLQTXHVWLRQLQWHUPVRIWKHFRPSRXQGUDWHRIUHWXUQIRUWKHSHULRGrGLV
0HDQ9DULDQFH2SWLPL]DWLRQ
2QH LPSRUWDQW DSSOLFDWLRQ RI WKH SUREDELOLW\ IRUHFDVWV RI DVVHW UHWXUQV LV PHDQ YDULDQFH RSWLPL]DWLRQ2SWLPL]DWLRQLVWKHSURFHVVRILGHQWLI\LQJSRUWIROLRVWKDWKDYHWKHKLJKHVWSRVVLEOH H[SHFWHGUHWXUQIRUDJLYHQOHYHORIULVNRUWKHORZHVWSRVVLEOHULVNIRUDJLYHQH[SHFWHGUHWXUQ 6XFKD SRUWIROLR LV FRQVLGHUHG ³HIILFLHQW´ DQG WKH ORFXV RI DOO HIILFLHQW SRUWIROLRV LV FDOOHG WKH HIILFLHQWIURQWLHU$VLPSOHWZRDVVHWHIILFLHQWIURQWLHUFRQVWUXFWHGIURPODUJHFDSVWRFNVDQG86 7UHDVXU\%LOOVLVVKRZQLQ([KLELW$OOLQYHVWRUVVKRXOGKROGSRUWIROLRVWKDWDUHHIILFLHQWZLWK UHVSHFWWRWKHDVVHWVLQWKHLURSSRUWXQLW\VHW
(
mn zs n+) e
§ ·
¨ + ¸
© ¹
−
m z s
e
n([KLELW(IILFLHQW)URQWLHU/DUJHFDS6WRFNVDQG867UHDVXU\%LOOV±
6RXUFHRIXQGHUO\LQJGDWD0RUQLQJVWDU,QF8VHGZLWKSHUPLVVLRQ$OOULJKWVUHVHUYHG&DOFXODWLRQVE\' 3.UROO$VVHWFODVVHV UHSUHVHQWHGE\WKH,EERWVRQ$VVRFLDWHV,$6WRFNV%RQGV%LOOVDQG,QIODWLRQ6%%,VHULHVDVIROORZVL/DUJH&DS6WRFNV,$
6%%,86/DUJH6WRFN7586'([WDQGLL86GD\7UHDVXU\%LOOV,$6%%,86'D\7%LOO7586')RUDGHWDLOHGGHVFULSWLRQ RIWKH6%%,VHULHVVHH&KDSWHU³'HVFULSWLRQRIWKH%DVLF6HULHV´³6WRFNV%RQGV%LOOVDQG,QIODWLRQ´DQG³6%%,´DUHUHJLVWHUHG WUDGHPDUNVRI0RUQLQJVWDU,QF$OOULJKWVUHVHUYHG8VHGZLWKSHUPLVVLRQ
7KH PRVW ZLGHO\ DFFHSWHG IUDPHZRUN IRU RSWLPL]DWLRQ LV 0DUNRZLW] RU PHDQYDULDQFH RSWLPL]DWLRQ092ZKLFKPDNHVWKHIROORZLQJDVVXPSWLRQVL7KHIRUHFDVWPHDQRUH[SHFWHG UHWXUQGHVFULEHVWKHDWWULEXWHWKDWLQYHVWRUVFRQVLGHUWREHGHVLUDEOHDERXWDQDVVHWLL7KHULVN RIWKHDVVHWLVPHDVXUHGE\LWVH[SHFWHGVWDQGDUGGHYLDWLRQRIUHWXUQVDQGLLL7KHLQWHUDFWLRQ EHWZHHQRQH DVVHW DQG DQRWKHU LV FDSWXUHG E\ WKH H[SHFWHG FRUUHODWLRQ FRHIILFLHQW RI WKH WZR DVVHWV¶UHWXUQV092WKXVUHTXLUHVIRUHFDVWVRIWKHUHWXUQDQGVWDQGDUGGHYLDWLRQRIHDFKDVVHW DQGWKHFRUUHODWLRQRIHDFKDVVHWZLWKHYHU\RWKHUDVVHW
,Q WKH V +DUU\ 0DUNRZLW] GHYHORSHG ERWK WKH FRQFHSW RI WKH HIILFLHQW IURQWLHU DQG WKH PDWKHPDWLFDOPHDQVRIFRQVWUXFWLQJLWPHDQYDULDQFHRSWLPL]DWLRQ
7KH VWDQGDUG GHYLDWLRQ LV WKH VTXDUH URRW RI WKH YDULDQFH KHQFH WKH WHUP ³PHDQYDULDQFH´ LQ GHVFULELQJ WKLV IRUP RI WKH RSWLPL]DWLRQSUREOHP
0DUNRZLW]+0Portfolio Selection: Efficient Diversification of Investments 1HZ<RUN-RKQ:LOH\ 6RQV
(VWLPDWLQJ5HWXUQV5LVNVDQG&RUUHODWLRQV
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
0HDQVRU([SHFWHG5HWXUQV
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
DUHDWWHPSWVWRGLVFHUQWKHPDUNHW¶VH[SHFWDWLRQVLHWRUHDGZKDWWKHPDUNHWLWVHOILVIRUHFDVWLQJ
)RU VRPH DVVHWV H[SHFWHG UHWXUQV FDQ EH HVWLPDWHG XVLQJ FXUUHQW PDUNHW GDWD DORQH )RU H[DPSOH WKH \LHOG RQ D ULVNOHVV ERQG LV DQ HVWLPDWH RI LWV H[SHFWHG UHWXUQ )RU RWKHU DVVHWV FXUUHQWGDWDDUHQRWVXIILFLHQW6WRFNVIRUH[DPSOHKDYHQRH[DFWDQDORJXHWRWKH\LHOGRQD ERQG,QVXFKFDVHVZHXVHWKHVWDWLVWLFDOWLPHVHULHVSURSHUWLHVRIKLVWRULFDOGDWDLQIRUPLQJWKH HVWLPDWHV
7RNQRZZKLFKGDWDWRXVHZKHQHVWLPDWLQJH[SHFWHGUHWXUQVZHQHHGWRNQRZWKHUHEDODQFLQJ IUHTXHQF\RIWKHSRUWIROLRVDQGWKHLQYHVWPHQWKRUL]RQ,QRXUH[DPSOHZHZLOODVVXPHDQDQQXDO UHEDODQFLQJIUHTXHQF\DQGD\HDUSODQQLQJKRUL]RQ7KHUHEDODQFLQJIUHTXHQF\JLYHVWKHWLPH XQLWVLQZKLFKUHWXUQVDUHPHDVXUHG
:LWKD\HDUKRUL]RQWKHUHOHYDQWULVNOHVVUDWHLVWKH\LHOGRQD\HDUFRXSRQERQG7KLV ULVNOHVVUDWHLVWKHEDVHOLQHIURPZKLFKWKHH[SHFWHGUHWXUQRQHYHU\RWKHUDVVHWFODVVLVGHULYHG E\DGGLQJRUVXEWUDFWLQJULVNSUHPLXPV
,WLVDOVRSRVVLEOHWRFRQGXFWDVLPXODWLRQXVLQJHQWLUHGDWDVHWVWKDWLVZLWKRXWHVWLPDWLQJWKHVWDWLVWLFDOSDUDPHWHUVRIWKHGDWD VHWV7\SLFDOO\LQVXFKDQRQSDUDPHWULFVLPXODWLRQWKHIUHTXHQF\RIDQHYHQWRFFXUULQJLQWKHVLPXODWHGKLVWRU\LVHTXDOWRWKH IUHTXHQF\RIWKHHYHQWRFFXUULQJLQWKHDFWXDOKLVWRU\XVHGWRFRQVWUXFWWKHGDWDVHW
/DUJH&DS6WRFNV
7KHH[SHFWHGUHWXUQRQODUJHFDSVWRFNVLVWKHULVNOHVVUDWHSOXVWKHH[SHFWHGULVNSUHPLXPRI ODUJHFDSVWRFNVRYHUERQGVWKDWDUHULVNOHVVRYHUWKHLQYHVWPHQWKRUL]RQ
%RQGVDQG%LOOV
)RUGHIDXOWIUHHERQGVZLWKDPDWXULW\HTXDOWRWKHSODQQLQJKRUL]RQWKHH[SHFWHGUHWXUQLVWKH
\LHOGRQWKHERQG)RUERQGVZLWKRWKHUPDWXULWLHVWKHH[SHFWHGERQGKRUL]RQSUHPLXPVKRXOGEH DGGHGWRWKHULVNOHVVUDWHIRUORQJHUPDWXULWLHVRUVXEWUDFWHGIURPWKHULVNOHVVUDWHIRUVKRUWHU PDWXULWLHV%HFDXVHH[SHFWHGFDSLWDOJDLQVRQDERQGDUH]HURWKHH[SHFWHGKRUL]RQSUHPLXP LVHVWLPDWHGE\WKHKLVWRULFDODYHUDJHGLIIHUHQFHRIWKHLQFRPHUHWXUQVRQWKHERQGV
)RU867UHDVXU\%LOOVWKHH[SHFWHGUHWXUQRYHUDJLYHQWLPHKRUL]RQHTXDOVWKHH[SHFWHGUHWXUQ RQD7UHDVXU\ERQGRIDVLPLODUKRUL]RQOHVVWKHH[SHFWHGKRUL]RQSUHPLXPRIERQGVRYHUELOOV 7KH ORQJWHUP KRUL]RQ SUHPLXP LV HVWLPDWHG E\ WKH KLVWRULFDO DYHUDJH RI WKH GLIIHUHQFH RI WKH LQFRPHUHWXUQRQERQGVDQGWKHUHWXUQRQELOOV7KLVIRUHFDVWW\SLFDOO\GLIIHUVIURPWKHFXUUHQW\LHOG RQD867UHDVXU\%LOOEHFDXVHDSRUWIROLRRI867UHDVXU\%LOOVLVUROOHGRYHUWKHSURFHHGVRI PDWXULQJELOOVDUHLQYHVWHGLQQHZELOOVDW\LHOGVQRW\HWNQRZQGXULQJWKHWLPHKRUL]RQGHVFULEHG
6WDQGDUG'HYLDWLRQV
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
&RUUHODWLRQV
&RUUHODWLRQVEHWZHHQWKHDVVHWFODVVHVDUHHVWLPDWHGIURPKLVWRULFDOGDWDDVGHVFULEHGLQ&KDSWHU
&RUUHODWLRQVEHWZHHQPDMRUDVVHWFODVVHVFKDQJHRYHUWLPH([KLELWVKRZVWKHKLVWRULFDO FRUUHODWLRQRIDQQXDOUHWXUQVRQODUJHFDSVWRFNVDQGORQJWHUPJRYHUQPHQWERQGVRYHU\HDU UROOLQJSHULRGVIURP±WKURXJK
7KHH[SHFWHGFDSLWDOJDLQRQDSDUERQGLVVHOIHYLGHQWO\]HUR)RUD]HURFRXSRQRURWKHUGLVFRXQWERQGLQYHVWRUVH[SHFWWKH SULFHWRULVHDVWKHERQGDJHVEXWWKHH[SHFWHGSRUWLRQRIWKLVSULFHLQFUHDVHVKRXOGQRWEHFRQVLGHUHGDFDSLWDOJDLQ,WLVDIRUP RILQFRPHUHWXUQ
([KLELW<HDU5ROOLQJ3HULRG&RUUHODWLRQVRI$QQXDO5HWXUQVRI/DUJH&DS6WRFNVDQG /RQJWHUP*RYHUQPHQW%RQGV±
6RXUFHRIXQGHUO\LQJGDWD0RUQLQJVWDU,QF8VHGZLWKSHUPLVVLRQ$OOULJKWVUHVHUYHG&DOFXODWLRQVE\' 3.UROO$VVHWFODVVHV UHSUHVHQWHGE\WKH,EERWVRQ$VVRFLDWHV,$6WRFNV%RQGV%LOOVDQG,QIODWLRQ6%%,VHULHVDVIROORZVL/DUJH&DS6WRFNV,$
6%%,86/DUJH6WRFN7586'([WDQGLL/RQJ7HUPLH\HDU*RYHUQPHQW%RQGV,$6%%,86/7 *RYW7586')RUD GHWDLOHGGHVFULSWLRQRIWKH6%%,VHULHVVHH&KDSWHU³'HVFULSWLRQRIWKH%DVLF6HULHV´³6WRFNV%RQGV%LOOVDQG,QIODWLRQ´DQG
³6%%,´DUHUHJLVWHUHGWUDGHPDUNVRI0RUQLQJVWDU,QF$OOULJKWVUHVHUYHG8VHGZLWKSHUPLVVLRQ
8VLQJ,QSXWVWR)RUP2WKHU3RUWIROLRV
,Q([KLELWLQSXWVDUHSURYLGHGWKDWFDQEHXVHGLQIRUPLQJSRUWIROLRV
Precalculated³%XLOGLQJ%ORFNVIRU([SHFWHG5HWXUQ&RQVWUXFWLRQ´DUHSUHVHQWHGLQWDEOHIRUPDWLQWKHIXOOYHUVLRQ2020 SBBI® Yearbook DV RI 'HFHPEHU IRU WKH IROORZLQJ L<LHOGV /RQJWHUP \HDU 86 7UHDVXU\ &RXSRQ %RQG <LHOG ,QWHUPHGLDWHWHUP\HDU867UHDVXU\&RXSRQ1RWH<LHOG6KRUWWHUPGD\867UHDVXU\%LOO<LHOGLL)L[HG,QFRPH 5LVN 3UHPLXPV ([SHFWHG GHIDXOW SUHPLXP ([SHFWHG ORQJWHUP KRUL]RQ SUHPLXP ([SHFWHG LQWHUPHGLDWHWHUP KRUL]RQ SUHPLXPLLL(TXLW\5LVN3UHPLXPV/RQJKRUL]RQH[SHFWHGHTXLW\ULVNSUHPLXP,QWHUPHGLDWHKRUL]RQH[SHFWHGHTXLW\ULVN SUHPLXP6KRUWKRUL]RQH[SHFWHGHTXLW\ULVNSUHPLXP6PDOOFDSSUHPLXP)RUPRUHLQIRUPDWLRQYLVLW
GSFRVWRIFDSLWDOFRPVWRFNVERQGVELOOVLQIODWLRQVEEL\HDUERRN
([KLELW 2SWLPL]DWLRQ ,QSXWV <HDUHQG /DUJH&DS 6WRFNV /RQJWHUP *RYHUQPHQW
%RQGVDQG867UHDVXU\%LOOV
6RXUFHRIXQGHUO\LQJGDWD0RUQLQJVWDU,QF8VHGZLWKSHUPLVVLRQ$OOULJKWVUHVHUYHG&DOFXODWLRQVE\' 3.UROO$VVHWFODVVHV UHSUHVHQWHGE\WKH,EERWVRQ$VVRFLDWHV,$6WRFNV%RQGV%LOOVDQG,QIODWLRQ6%%,VHULHVDVIROORZVL/DUJH&DS6WRFNV,$
6%%,86/DUJH6WRFN7586'([WLL/RQJ7HUPLH\HDU*RYHUQPHQW%RQGV,$6%%,86/7*RYW7586'DQGLLL86 GD\7UHDVXU\%LOOV,$6%%,86'D\7%LOO7586')RUDGHWDLOHGGHVFULSWLRQRIWKH6%%,VHULHVVHH&KDSWHU³'HVFULSWLRQ RIWKH%DVLF6HULHV´³6WRFNV%RQGV%LOOVDQG,QIODWLRQ´DQG³6%%,´DUHUHJLVWHUHGWUDGHPDUNVRI0RUQLQJVWDU,QF$OOULJKWVUHVHUYHG 8VHGZLWKSHUPLVVLRQ
*LYHQ D FRPSOHWH VHW RI LQSXWV WKH H[SHFWHG UHWXUQ DQG VWDQGDUG GHYLDWLRQ RI DQ\ SRUWIROLR HIILFLHQWRURWKHURIWKHDVVHWFODVVHVFDQEHFDOFXODWHG7KHH[SHFWHGUHWXUQRIDSRUWIROLRLVWKH ZHLJKWHGDYHUDJHRIWKHH[SHFWHGUHWXUQVRIWKHDVVHWFODVVHV
)RUH[DPSOHUHIHUULQJWRWKHLQSXWVLQ([KLELWDSRUWIROLRFRPSULVHGRIODUJHFDSVWRFNVRQO\
ZRXOGKDYHDQH[SHFWHGUHWXUQRIDQGDVWDQGDUGGHYLDWLRQRI,IWKHSRUWIROLRPL[LV FKDQJHGWRVD\ODUJHFDSVWRFNVORQJWHUPJRYHUQPHQWERQGVDQG86 7UHDVXU\%LOOVWKHH[SHFWHGUHWXUQRIWKLVQHZSRUWIROLRPL[FDQEHFDOFXODWHGE\DSSO\LQJWKH DERYHIRUPXODDJDLQXVLQJWKHLQSXWVLQ([KLELW
[[[
&RUUHODWLRQ
([SHFWHG5HWXUQ 6WDQGDUG'HYLDWLRQ 6WRFNV %RQGV %LOOV
6WRFNV
%RQGV
%LOOV
:KHUH
rp 7KHH[SHFWHGUHWXUQRIWKHSRUWIOLRp n 7KHQXPEHURIDVVHWFODVVHV
xi 7KHSRUWIROLRZHLJKWRIDVVHWFODVViVFDOHGVXFKWKDW
:KHUH
Ui 7KHH[SHFWHGUHWXUQRIDVVHWFODVVi
=
= ¦
n
p i i
i
r x r
=
¦ =
n i i
x
7KHVWDQGDUGGHYLDWLRQRIWKHSRUWIROLRGHSHQGVQRWRQO\RQWKHVWDQGDUGGHYLDWLRQVRIWKHDVVHW FODVVHVEXWDOVRRQDOORIWKHFRUUHODWLRQV,WLVJLYHQE\
7KHVWDQGDUGGHYLDWLRQRIWKHQHZSRUWIROLRODUJHFDSVWRFNVORQJWHUPJRYHUQPHQW ERQGV DQG 86 7UHDVXU\ %LOOV FDQ EHFDOFXODWHG XVLQJ WKHLQSXWV IURP ([KLELW DV VKRZQLQ([KLELW
([KLELW &DOFXODWLRQ RI ([DPSOH 3RUWIROLR &RPSULVHG RI /DUJHFDS VWRFNV /RQJWHUP*RYHUQPHQW%RQGVDQG867UHDVXU\%LOOV
:KHUH
7KHVWDQGDUGGHYLDWLRQRIWKHSRUWIROLR
xi DQGxj 7KHSRUWIROLRZHLJKWVRIDVVHWFODVVHVi DQGj
DQG 7KHVWDQGDUGGHYLDWLRQVRIUHWXUQVRQDVVHWFODVVHVi DQGj pij 7KHFRUUHODWLRQEHWZHHQUHWXUQVRQDVVHWFODVVHVi DQGj
(note that rij equals one and that rij is equal to rji).
σ σ σ
= =
=
¦ ¦
n n
p i j i j ij
i i
x x p
σ
pσ
i σj6WRFNVDVVHWFODVV %RQGVDVVHWFODVV %LOOVDVVHWFODVV 6WRFNV 6WRFNV 6WRFNV %RQGV 6WRFNV %LOOV
%RQGV 6WRFNV %RQGV %RQGV %RQGV %LOOV
%LOOV 6WRFNV %LOOV %RQGV %LOOV %LOOV
[ ı S
î î
[ [ ı ı S
îîîî
[ [ ı ı S
îîîî
[ [ ı ı S
îîîî
[ ı S
î î
[ [ ı ı S
îîîî
[ [ ı ı S
îîîî
[ [ ı ı S
îîîî
[ ı S
î î
%\VXPPLQJWKHVHWHUPVDQGWDNLQJWKHVTXDUHURRWRIWKHWRWDOWKHUHVXOWLVDVWDQGDUGGHYLDWLRQ RI
(QKDQFHPHQWVWR0HDQ9DULDQFH2SWLPL]DWLRQ
,EERWVRQ$VVRFLDWHVZDVDQHDUO\DGRSWHURIPHDQYDULDQFHRSWLPL]DWLRQWRGHYHORSDVVHWFODVV PRGHOJXLGHOLQHVDQGFRQWLQXHVWRDVVLVWWKHLQGXVWU\LQWKHGHYHORSPHQWRIHQKDQFHPHQWVWRWKH WUDGLWLRQDOPHDQYDULDQFHDSSURDFKDVZHOODVWKHVWDWHRIWKHDUWWHFKQLTXHVGHVFULEHGODWHULQ WKH FKDSWHU 2YHU WKH ODVW KDOI FHQWXU\ WKH 0DUNRZLW] PHDQYDULDQFH RSWLPL]DWLRQ 092 IUDPHZRUNKDVEHFRPHWKHWH[WERRNDSSURDFKIRUFUHDWLQJWKHVHRSWLPDODVVHWDOORFDWLRQVEXW WKHDSSURDFKKDVVHYHUDOVKRUWFRPLQJV
6KRUWFRPLQJVRI7UDGLWLRQDO2SWLPL]DWLRQ7HFKQLTXHV
2QHQRWDEOHVKRUWFRPLQJLVWKDWWKHRXWSXWRSWLPDODVVHWDOORFDWLRQZHLJKWVLVYHU\VHQVLWLYHWR WKHLQSXWVH[SHFWHGUHWXUQVVWDQGDUGGHYLDWLRQVDQGFRUUHODWLRQV,QSXWVHQVLWLYLW\RIWHQOHDGV WR KLJKO\ FRQFHQWUDWHG DOORFDWLRQV LQ RQO\ D VPDOO QXPEHU RI WKH DYDLODEOH DVVHW FODVVHV )RU H[DPSOHLIDW\SLFDORSWLPL]DWLRQVWDUWVZLWKDQRSSRUWXQLW\VHWRIDERXWDVVHWFODVVHVMXVWD IHZRIWKHVHDVVHWFKRLFHVPLJKWHQGXSLQWKHUHVXOWLQJRSWLPDODOORFDWLRQZLWKWKHUHPDLQLQJ DVVHWFKRLFHVQRWHYHQJHWWLQJDPHQWLRQ
0HDQYDULDQFHRSWLPL]DWLRQLVDSRZHUIXOWRROEXWLWQHHGVWREHXVHGZLWKFDXWLRQ)RULQVWDQFH EDVLQJPHDQYDULDQFHRSWLPL]DWLRQLQSXWVRQVKRUWHUSHULRGVFDQFRQWULEXWHWRH[WUHPHUHVXOWV
%DVLQJ WKH PHDQYDULDQFH RSWLPL]DWLRQ LQSXWV RQ ORQJHU SHULRGV VXFK DV WKRVH SUHVHQWHG HOVHZKHUH LQ WKLV ERRN FDQ KHOS PLWLJDWH WKH H[WUHPH DVVHW DOORFDWLRQV PL[HV $OVR WKHUH LV XVXDOO\DPRUHFRQVLVWHQWUDWLRRIUHWXUQWRULVNDPRQJVWWKHGLIIHUHQWDVVHWFODVVHVZKHQXVLQJ ORQJHUSHULRGV
3ODFLQJPD[LPXPDQGPLQLPXPDOORFDWLRQFRQVWUDLQWVRQHDFKDVVHWLVWKHPRVWFRPPRQVROXWLRQ WRWKHSUREOHPRIKLJKO\FRQFHQWUDWHGDVVHWDOORFDWLRQV)RULQVWDQFHZHFRXOGVSHFLI\DPLQLPXP DOORFDWLRQRIDQGDPD[LPXPDOORFDWLRQRIIRUHDFKRIWKHQLQHDVVHWFKRLFHV7KLVZRXOG HQVXUHWKDWHDFKDVVHWJHWVUHSUHVHQWHGLQWKHILQDODOORFDWLRQDQGWKDWQRVLQJOHDVVHWFRPSOHWHO\
GRPLQDWHVLQWKHILQDODOORFDWLRQPL[8QIRUWXQDWHO\WKHVHDUWLILFLDOPLQLPXPVDQGPD[LPXPVDUH DUELWUDU\DQGXVXDOO\HQGXSOLPLWLQJWKHDELOLW\RIWKHRSWLPL]HUWRSURSHUO\DFWRQWKHLQIRUPDWLRQ FRQWDLQHGLQWKHLQSXWV
%ODFN/LWWHUPDQDQG5HVDPSOLQJ7HFKQLTXHV
7ZRSRSXODUHQKDQFHPHQWVWRWUDGLWLRQDORSWLPL]DWLRQWHFKQLTXHVKDYHHPHUJHGLQUHFHQW\HDUV WKDW FDQ KHOS RYHUFRPH WKHVH GLIILFXOWLHV :KLOH ERWK RI WKHVH PHWKRGV FDQ KHOS GHYHORS ZHOO GLYHUVLILHGDVVHWDOORFDWLRQVWKH\DSSURDFKWKHSUREOHPLQYHU\GLIIHUHQWZD\V7KHILUVWRIWKHVH WKH%ODFN/LWWHUPDQ PRGHO DWWHPSWV WR FUHDWH EHWWHU LQSXWV 7KH VHFRQG UHVDPSOHG PHDQ YDULDQFHRSWLPL]DWLRQDWWHPSWVWREXLOGDEHWWHURSWLPL]HU
7KH%ODFN/LWWHUPDQPRGHOZDVFUHDWHGE\)LVFKHU%ODFNDQG5REHUW/LWWHUPDQLQWKHODWHV 7KH %ODFN/LWWHUPDQ PRGHO FRPELQHV LQYHVWRUV¶ YLHZV UHJDUGLQJ H[SHFWHG UHWXUQV DQG WKH H[SHFWHGUHWXUQVSUHGLFWHGE\WKHFDSLWDODVVHWSULFLQJPRGHOWRIRUPDVLQJOHEOHQGHGHVWLPDWH RIH[SHFWHGUHWXUQV:KHQWKLVQHZFRPELQHGHVWLPDWHLVXVHGDVDQLQSXWZLWKLQDWUDGLWLRQDO PHDQYDULDQFHRSWLPL]DWLRQIUDPHZRUNLWSURGXFHVZHOOGLYHUVLILHGSRUWIROLRVWKDWLQFOXGHQRWRQO\
PDUNHWEDVHGDVVHWDOORFDWLRQVEXWDOVRDOORFDWLRQVLQDVVHWVWKDWUHFHLYHGIDYRUDEOHYLHZV
7KHVHFRQGDSSURDFKUHVDPSOHGPHDQYDULDQFHRSWLPL]DWLRQJUHZRXWRIWKHZRUNRIDQXPEHU RIDXWKRUVEXWLWLVPRVWFORVHO\DVVRFLDWHGZLWKWKHZRUNRI5LFKDUG0LFKDXG:KLOHWUDGLWLRQDO PHDQYDULDQFH RSWLPL]DWLRQ WUHDWV WKH FDSLWDO PDUNHW DVVXPSWLRQV DV LI WKH\ ZHUH NQRZQ ZLWK FRPSOHWH FHUWDLQW\ UHVDPSOHG PHDQYDULDQFH RSWLPL]DWLRQ UHFRJQL]HV WKDW WKH FDSLWDO PDUNHW DVVXPSWLRQVDUHIRUHFDVWVDQGDUHWKHUHIRUHQRWNQRZQZLWKFRPSOHWHFHUWDLQW\
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
,QDGGLWLRQWRWKHSUREOHPRIJHWWLQJUHVXOWVWKDWDUHKLJKO\FRQFHQWUDWHGLQMXVWDIHZRIWKHDVVHWV DYDLODEOHWKHUHDUHWZRPRUHFULWLFLVPVRIWKHWUDGLWLRQDOPHDQYDULDQFHRSWLPL]DWLRQIUDPHZRUN
)LUVWWKHWUDGLWLRQDODSSURDFKIRFXVHVRQDVXEVHWRIWKHWRWDOSRUWIROLR7UDGLWLRQDOO\WKHIRFXVLV RQILQGLQJDPL[RIDVVHWFODVVHVWKDWPD[LPL]HVWKHH[SHFWHGUHWXUQVXEMHFWWRDULVNFRQVWUDLQW +RZHYHUEHFDXVHWKHSXUSRVHRIPRVWDVVHWSRUWIROLRVLVWRIXQGDVSHFLILHGIXWXUHFDVKIORZ
0RQWH&DUORVLPXODWLRQLVDSUREOHPVROYLQJWHFKQLTXHXWLOL]HGWRDSSUR[LPDWHWKHSUREDELOLW\RIFHUWDLQRXWFRPHVE\SHUIRUPLQJ PXOWLSOHWULDOUXQVFDOOHGVLPXODWLRQVXVLQJUDQGRPYDULDEOHV7KHSUREDELOLW\GLVWULEXWLRQRIWKHUHVXOWVLVFDOFXODWHGDQGDQDO\]HG LQRUGHUWRLQIHUZKLFKRXWFRPHVDUHPRVWOLNHO\WREHSURGXFHG
6HH 0DUNRZLW] + 8VPHQ 1 ³5HVDPSOHG )URQWLHUV YV 'LIIXVH %D\HV $Q ([SHULPHQW´Journal of Investment Management9RO1R
VWUHDP±DOLDELOLW\±WKHWUXHULVNIRUWKHSRUWIROLRLVQRWWKHVWDQGDUGGHYLDWLRQRIWKHDVVHWVRUWKH SHUIRUPDQFHRIWKHDVVHWVUHODWLYHWRWKDWRISHHUVEXWQRWEHLQJDEOHWRIXQGWKHIXWXUHOLDELOLW\
$QDVVHWDOORFDWLRQDSSURDFKWKDWWDNHVWKHIXWXUHOLDELOLW\LQWRDFFRXQWLVFDOOHGOLDELOLW\UHODWLYH RSWLPL]DWLRQ RU VXUSOXV RSWLPL]DWLRQ 7KH XVXDO PHWKRG HPSOR\HG WR DFFRPSOLVK WKLV LV WR FRQVWUDLQWKHRSWLPL]HUWRKROGVKRUWDQDVVHWFODVVUHSUHVHQWLQJWKHOLDELOLW\
6HFRQGWKHWUDGLWLRQDOPHDQYDULDQFHRSWLPL]DWLRQIUDPHZRUNDVVXPHVWKDWWKHUHWXUQVRIWKH DVVHWV LQ WKH RSWLPL]DWLRQ DUH QRUPDOO\ GLVWULEXWHG $V LOOXVWUDWHG LQ ([KLELW WKH UHWXUQ GLVWULEXWLRQVRIGLIIHUHQWDVVHWFODVVHVGRQRWDOZD\VIROORZDVWDQGDUGV\PPHWULFDOEHOOVKDSHG FXUYH 6RPH DVVHWV KDYH GLVWULEXWLRQV WKDW DUH VNHZHG WR WKH OHIW RU ULJKW ZKLOH RWKHUV KDYH GLVWULEXWLRQVWKDWDUHVNLQQLHURUIDWWHUWKDQRWKHUV7KHVHPRUHFRPSOLFDWHGFKDUDFWHULVWLFVDUH FDOOHG VNHZQHVV DQG NXUWRVLV UHVSHFWLYHO\ 7KH QH[W ZDYH RI HQKDQFHPHQWV WR WKH WUDGLWLRQDO PHDQYDULDQFH RSWLPL]DWLRQ DUH IUDPHZRUNV WKDW LQFRUSRUDWH WKHVH DGGLWLRQDO W\SHV RI DEQRUPDOLWLHVLQWRWKHRSWLPL]DWLRQ
0DUNRZLW]
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
%HFDXVH 0DUNRZLW]¶V ILUVW HIIRUW ZDV VR VLPSOH DQG SRZHUIXO LW DWWUDFWHG D JUHDW QXPEHU RI IROORZHUV 7KH JUHDWHU WKH IROORZLQJ EHFDPH WKH IHZHU TXHVWLRQHUV GHEDWHG LWV PHULWV 0DUNRZLW]¶V RULJLQDO ZRUN LV V\QRQ\PRXV ZLWK PRGHUQ SRUWIROLR WKHRU\ DQG KDV EHHQ WDXJKW LQ EXVLQHVVVFKRROVIRUJHQHUDWLRQVDQGQRWVXUSULVLQJO\LVVWLOOZLGHO\XVHGWRGD\
7KHQ FDPH WKH FUDVK RI DQG SHRSOH VWDUWHG WR DVN TXHVWLRQV 7KH FRQIOXHQFH RI WKH HFRQRPLF WUDXPD DQG WKH WHFKQRORJLFDO DGYDQFHV RI UHFHQW GHFDGHV PDGH WKH SRVWFUDVK HQYLURQPHQWWKHSHUIHFWPRPHQWWRXSJUDGHWRDQHZPRGHOEXLOWDURXQG0DUNRZLW]¶VIXQGDPHQWDO SULQFLSOHVRIULVNUHZDUGDQGFRUUHODWLRQ:HGXERXUXSGDWHGPRGHO³0DUNRZLW]´7KLVVHFWLRQ LVDQDGDSWDWLRQRIDDUWLFOH³7KH1HZ(IILFLHQW)URQWLHU´E\3DXO'.DSODQ0RUQLQJVWDU
&DQDGD¶VGLUHFWRURIUHVHDUFKDQG6DP/6DYDJHFRQVXOWLQJSURIHVVRUDW6WDQIRUG8QLYHUVLW\
0DUNRZLW]
7KH)ODZRI$YHUDJHV
7KHPHDQYDULDQFHPRGHORI+DUU\0DUNRZLW]ZDVWKHILUVWV\VWHPDWLFDWWHPSWWRFXUHZKDW 6DYDJHFDOOHGWKH³IODZRIDYHUDJHV´,QJHQHUDOWKHIODZRIDYHUDJHVLVDVHWRIV\VWHPDWLF HUURUVWKDWRFFXUZKHQSHRSOHXVHVLQJOHQXPEHUVXVXDOO\DYHUDJHVWRGHVFULEHXQFHUWDLQIXWXUH TXDQWLWLHV)RUH[DPSOHLI\RXSODQWRUREDEDQNRIPLOOLRQDQGKDYHRQHFKDQFHLQRI JHWWLQJDZD\ZLWKLW\RXUDYHUDJHWDNHLV,I\RXGHVFULEHG\RXUDFWLYLW\EHIRUHKDQGDV
³PDNLQJ´\RXZRXOGEHFRUUHFWRQDYHUDJH%XWWKLVLVDWHUULEOHFKDUDFWHUL]DWLRQRID EDQNKHLVW<HWDV6DYDJHGLVFXVVHGWKLVYHU\³IODZRIDYHUDJHV´LVPDGHDOOWKHWLPHLQEXVLQHVV SUDFWLFH DQG KHOSV H[SODLQ ZK\ HYHU\WKLQJ LV EHKLQG VFKHGXOH EH\RQG EXGJHW DQG EHORZ SURMHFWLRQ7KLVSKHQRPHQRQZDVDQDFFHVVRU\WRWKHJOREDOILQDQFLDOFULVLVWKDWFXOPLQDWHGLQ
0DUNRZLW]¶VPHDQYDULDQFHPRGHOGLVWLQJXLVKHGEHWZHHQGLIIHUHQWLQYHVWPHQWVWKDWKDGWKHVDPH DYHUDJHH[SHFWHGUHWXUQEXWGLIIHUHQWULVNVPHDVXUHGDVYDULDQFHRULWVVTXDUHURRWVWDQGDUG GHYLDWLRQ7KLVEUHDNWKURXJKV\VWHPDWLFDWWHPSWWRFXUHWKHIODZRIDYHUDJHVXOWLPDWHO\JDUQHUHG D1REHO3UL]HIRULWVLQYHQWRU+RZHYHUWKHXVHRIVWDQGDUGGHYLDWLRQDQGFRYDULDQFHLQWURGXFHV DKLJKHURUGHUYHUVLRQRIWKHIODZRIDYHUDJHVLQWKDWWKHVHFRQFHSWVDUHWKHPVHOYHVDYHUVLRQRI DYHUDJHV
0DNLQJD*UHDW,GHD%HWWHU
%\WDNLQJDGYDQWDJHRIWKHYHU\ODWHVWLQHFRQRPLFWKRXJKWDQGFRPSXWHUWHFKQRORJ\ZHFDQLQ HIIHFWDGGPRUHWKUXVWWRWKHRULJLQDOIUDPHZRUNRIWKH0DUNRZLW]SRUWIROLRRSWLPL]DWLRQPRGHO 7KHUHVXOWLVDGUDPDWLFDOO\PRUHSRZHUIXOPRGHOWKDWLVPRUHDOLJQHGZLWKVWFHQWXU\LQYHVWRU FRQFHUQVPDUNHWVDQGILQDQFLDOLQVWUXPHQWVVXFKDVRSWLRQV
2XUGLVFXVVLRQKHUHZLOOIRFXVRQILYHSUDFWLFDOHQKDQFHPHQWVWRWUDGLWLRQDOSRUWIROLRRSWLPL]DWLRQ WKDWFDQEHPDGHZLWKFXUUHQWWHFKQRORJ\
)LUVWZHXVHDVFHQDULREDVHGDSSURDFKWRDOORZIRUIDWWDLOHGGLVWULEXWLRQV³)DWWDLOHG´
UHWXUQ GLVWULEXWLRQV DUH QRW SRVVLEOH ZLWKLQ WKH FRQWH[W RI WUDGLWLRQDO PHDQYDULDQFH RSWLPL]DWLRQZKHUHUHWXUQGLVWULEXWLRQVDUHDVVXPHGWREHDGHTXDWHO\GHVFULEHGE\PHDQ DQGYDULDQFH
6HFRQGZHUHSODFHWKHVLQJOHSHULRGH[SHFWHGUHWXUQZLWKWKHORQJWHUPIRUZDUGORRNLQJ JHRPHWULFPHDQDVWKLVWDNHVLQWRDFFRXQWDFFXPXODWLRQRIZHDOWK
7KLUG ZH VXEVWLWXWH FRQGLWLRQDO YDOXH DW ULVN RU &9D5 ZKLFK IRFXVHV RQ WDLO ULVN IRU VWDQGDUGGHYLDWLRQZKLFKORRNVDWDYHUDJHYDULDWLRQ
)RXUWKWKHRULJLQDO0DUNRZLW]PRGHOXVHGDFRYDULDQFHPDWUL[WRPRGHOWKHGLVWULEXWLRQRI UHWXUQV RQ DVVHW FODVVHV ZH UHSODFH WKLV ZLWK D VFHQDULREDVHG PRGHO WKDW FDQ EH JHQHUDWHGZLWK0RQWH&DUORVLPXODWLRQDQGFDQLQFRUSRUDWHDQ\QXPEHURIGLVWULEXWLRQV
)LQDOO\ ZH H[SORLW QHZ VWDWLVWLFDO WHFKQRORJLHV SLRQHHUHG E\ 6DYDJH LQ WKH ILHOG RI SUREDELOLW\ PDQDJHPHQW 6DYDJH LQYHQWHG DQ DVWRQLVKLQJ QHZ WHFKQRORJ\ FDOOHG WKH 'LVWULEXWLRQ 6WULQJ RU ',67 ZKLFK HQFDSVXODWHV WKRXVDQGV RI WULDOV DV D VLQJOH GDWD HOHPHQWRUVSUHDGVKHHWFHOOWKXVHOLPLQDWLQJWKHPDLQGLVDGYDQWDJHRIWKHVFHQDULREDVHG DSSURDFK±WKHQHHGWRVWRUHDQGSURFHVVODUJHDPRXQWVRIGDWD
7KH6FHQDULR$SSURDFKYV/RJQRUPDO'LVWULEXWLRQV
2QH RI WKH OLPLWDWLRQV RI WKH WUDGLWLRQDO PHDQYDULDQFH RSWLPL]DWLRQ IUDPHZRUN DVVXPHV WKH GLVWULEXWLRQRIUHWXUQVRIWKHDVVHWVLQWKHRSWLPL]DWLRQFDQEHDGHTXDWHO\GHVFULEHGVLPSO\E\
PHDQ DQG YDULDQFH DORQH 7KH PRVW FRPPRQ GHSLFWLRQ RI WKLV DVVXPSWLRQ LV WR GUDZ WKH GLVWULEXWLRQRIHDFKDVVHWFODVVDVDV\PPHWULFDOEHOOVKDSHGFXUYHEXWDVVHWFODVVUHWXUQVGR QRWDOZD\VIDOOLQWRQRUPDOGLVWULEXWLRQV
2YHUWKH\HDUVYDULRXVDOWHUQDWLYHVKDYHEHHQSXWIRUWKWRUHSODFHPHDQYDULDQFHRSWLPL]DWLRQ ZLWK DQ RSWLPL]DWLRQ IUDPHZRUN WKDW WDNHV LQWR DFFRXQW WKH QRQQRUPDO IHDWXUHV RI UHWXUQ GLVWULEXWLRQV6RPHUHVHDUFKHUVKDYHSURSRVHGXVLQJGLVWULEXWLRQFXUYHVWKDWH[KLELWVNHZQHVV DQGNXUWRVLVLHKDYHIDWWDLOVZKLOHRWKHUVKDYHSURSRVHGXVLQJODUJHQXPEHUVRIVFHQDULRV EDVHGRQKLVWRULFDOGDWDRU0RQWH&DUORVLPXODWLRQ
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
HQMR\HGRQO\E\PRGHOVEDVHGRQFRQWLQXRXVGLVWULEXWLRQV
,Q([KLELWWKHVROLGJUD\OLQHUHSUHVHQWVWKHGLVWULEXWLRQRIDQQXDOUHWXUQVRIODUJHFDSVWRFNV ZKHQRXUVPRRWKHGVFHQDULREDVHGDSSURDFKLVXVHGDQGWKHUHGOLQHUHSUHVHQWVWKHGLVWULEXWLRQ
FXUYHRIDQQXDOUHWXUQVRIODUJHFDSVWRFNVZKHQWUDGLWLRQDOPHDQYDULDQFHDQDO\VLVLVXVHGDQG ZHDVVXPHWKDWUHWXUQVIROORZDORJQRUPDOGLVWULEXWLRQ
([KLELW'LVWULEXWLRQRI$QQXDO5HWXUQV/DUJHFDS6WRFNV/RJQRUPDO 'LVWULEXWLRQYV 6FHQDULR%DVHG0RGHO
,IZHH[WHQGDYHUWLFDOOLQHIURP3RLQW$GRZQWRWKH[D[LVWKHDUHDWRWKHOHIWDQGXQGHUQHDWK HDFKRIWKHFXUYHVUHSUHVHQWVWKHRFFXUUHQFHVRIDQQXDOUHWXUQVHTXDOWRRUOHVVWKDQLQWKLVFDVH QHJDWLYH%HFDXVHWKHVHDUHFXPXODWLYHGLVWULEXWLRQVZHFDQFDOFXODWHWKHSUREDELOLW\WKDW WKHDQQXDOUHWXUQVRIODUJHFDSVWRFNVZLOOEHOHVVWKDQRUHTXDOWRQHJDWLYHE\GLYLGLQJWKH DUHDXQGHUQHDWKHDFKRIWKHVPDOOHUFXUYHVWRWKHOHIWRI3RLQW$E\WKHWRWDODUHDXQGHUQHDWK HDFKRIWKHHQWLUHFXUYHV
)RUH[DPSOHORRNLQJWRWKHVFHQDULREDVHGPRGHOWKHDUHDWRWKHOHIWRIWKHYHUWLFDOOLQHXQGHU WKHVFHQDULREDVHGGLVWULEXWLRQUHSUHVHQWVRIWKHWRWDODUHDXQGHUQHDWKWKLVHQWLUHGLVWULEXWLRQ OLQH7KLVLPSOLHVWKDWWKHSUREDELOLW\RIODUJHFDSVWRFNVKDYLQJDORVVRIRUPRUHLV
&RUUHVSRQGLQJO\WKHDUHDWRWKHOHIWRIWKHYHUWLFDOOLQHIRUWKHORJQRUPDOGLVWULEXWLRQUHSUHVHQWV RIWKHWRWDODUHDXQGHUWKHHQWLUHORJQRUPDOGLVWULEXWLRQOLQH7KLVLPSOLHVWKDWWKHSUREDELOLW\
RIODUJHFDSVWRFNVUHWXUQLQJQHJDWLYHRUOHVVXVLQJWKHWUDGLWLRQDOPHDQYDULDQFHPRGHOLV
$V.DSODQHWDOGLVFXVV³WDLOHYHQWV´KDYHRFFXUUHGRIWHQWKURXJKRXWWKHKLVWRU\RIFDSLWDO PDUNHWV DOO RYHU WKH ZRUOG EXW WKH SUREDELOLWLHV DVVRFLDWHG ZLWK WKHP PD\ EH V\VWHPDWLFDOO\
XQGHUHVWLPDWHGZLWKLQWKHFRQWH[WRIWUDGLWLRQDOPHDQYDULDQFHDQDO\VLVZKHUHUHWXUQGLVWULEXWLRQV DUHDVVXPHGWREHORJQRUPDO7KHVFHQDULREDVHGPRGHOSURSRVHGE\.DSODQDQG6DYDJHLVD UHDOVWHSIRUZDUGDVLWEHWWHUPRGHOVWKHQRQWULYLDOSUREDELOLWLHVDVVRFLDWHGZLWKWDLOHYHQWV
)RUDPRUHGHWDLOHGGLVFXVVLRQRIWDLOHYHQWVDQGWKHLUQRQWULYLDOLW\VHH&KDSWHUZKHUH.DSODQ LQWURGXFHVDVHWRIPRQWKO\UHDOVWRFNPDUNHWWRWDOUHWXUQVJRLQJEDFNDIXOO\HDUV8VLQJWKHVH QHZUHWXUQVZHGHPRQVWUDWHWKDWWKHVHYHULW\RIWKHILQDQFLDOFULVLVRIZDVQRWXQLTXHEXW ZDVPHUHO\WKHODWHVWFKDSWHULQDORQJKLVWRU\RIPDUNHWPHOWGRZQV
*HRPHWULF0HDQYV6LQJOH3HULRG([SHFWHG5HWXUQ
,Q PHDQYDULDQFH RSWLPL]DWLRQ UHZDUG LV PHDVXUHG E\ H[SHFWHG UHWXUQZKLFKLVDIRUHFDVWRI DULWKPHWLFPHDQ+RZHYHURYHUORQJSHULRGVLQYHVWRUVDUHQRWFRQFHUQHGZLWKVLPSOHDYHUDJHV RIUHWXUQUDWKHUWKH\DUHFRQFHUQHGZLWKWKHDFFXPXODWLRQRIZHDOWK:HXVHIRUHFDVWHGORQJWHUP JHRPHWULFPHDQDVWKHPHDVXUHRIUHZDUGEHFDXVHLQYHVWRUVZKRSODQRQUHSHDWHGO\UHLQYHVWLQJ LQ WKH VDPH VWUDWHJ\ RYHU DQ LQGHILQLWH SHULRG ZRXOG VHHN WKH KLJKHVW UDWH RI JURZWK IRU WKH SRUWIROLRVDVPHDVXUHGE\JHRPHWULFPHDQ
&RQGLWLRQDO9DOXHDW5LVNYV6WDQGDUG'HYLDWLRQ
$VIRUULVNPXFKKDVEHHQZULWWHQDERXWKRZLQYHVWRUVDUHQRWFRQFHUQHGPHUHO\ZLWKWKHGHJUHH RIGLVSHUVLRQRIUHWXUQVDVPHDVXUHGE\VWDQGDUGGHYLDWLRQEXWUDWKHUZLWKKRZPXFKZHDOWK WKH\FRXOGORVH$QXPEHURIGRZQVLGHULVNPHDVXUHVLQFOXGLQJYDOXHDWULVNFRQGLWLRQDOYDOXHDW ULVNDQGPD[LPXPGUDZGRZQKDYHEHHQSURSRVHGWRUHSODFHVWDQGDUGGHYLDWLRQDVWKHPHDVXUH RIULVNLQVWUDWHJLFDVVHWDOORFDWLRQ:KLOHDQ\RQHRIWKHVHFRXOGEHXVHGRXUSUHIHUHQFHLVWR XVHFRQGLWLRQDOYDOXHDWULVN
&9D5LVUHODWHGWRYDOXHDWULVN9D5GHVFULEHVWKHOHIWWDLOLQWHUPVRIKRZPXFKFDSLWDOFDQEH ORVWRYHUDJLYHQSHULRGRIWLPH)RUH[DPSOHD9D5DQVZHUVDTXHVWLRQRIWKHIRUP+DYLQJ LQYHVWHG WKHUH LV D FKDQFH RI ORVLQJ ; RU PRUH LQ PRQWKV 7KH ³RU PRUH´
LPSOLFDWLRQVRI9D5DUHVRPHWLPHVRYHUORRNHGE\LQYHVWRUVZLWKVHULRXVLPSOLFDWLRQV$SSO\LQJ WKLVLGHDWRUHWXUQVWKH9D5LVWKHQHJDWLYHRIWKHWKSHUFHQWLOHRIWKHUHWXUQGLVWULEXWLRQ
&9D5LVWKHH[SHFWHGRUDYHUDJHORVVRIFDSLWDOVKRXOG9D5EHEUHDFKHG7KHUHIRUH&9D5LV DOZD\VJUHDWHUWKDQ9D5
6FHQDULRVYV&RUUHODWLRQ
,Q PHDQYDULDQFH DQDO\VLV WKH FRYDULDWLRQ RI WKH UHWXUQV RI HDFK SDLU RI DVVHW FODVVHV LV UHSUHVHQWHGE\DVLQJOHQXPEHUWKHFRUUHODWLRQFRHIILFLHQW7KLVLVPDWKHPDWLFDOO\HTXLYDOHQWWR DVVXPLQJWKDWDVLPSOHOLQHDUUHJUHVVLRQPRGHOLVDQDGHTXDWHGHVFULSWLRQRIKRZWKHUHWXUQVRQ
5DQNLQJLQYHVWPHQWVWUDWHJLHVE\IRUHFDVWHGJHRPHWULFPHDQLVVRPHWLPHVGHVFULEHGDVDSSO\LQJWKH.HOO\&ULWHULRQDQLGHD SURPRWHGE\:LOOLDP3RXQGVWRQHLQKLVERRNFortune’s Formula
WKHWZRDVVHWFODVVHVDUHUHODWHG,QIDFWWKH5VTXDUHGVWDWLVWLFRIDVLPSOHOLQHDUUHJUHVVLRQ PRGHOIRUWZRVHULHVRIUHWXUQVLVHTXDOWRWKHVTXDUHRIWKHFRUUHODWLRQFRHIILFLHQW
+RZHYHUIRUPDQ\SDLUVRIDVVHWFODVVHVDOLQHDUPRGHOPLVVHVWKHPRVWLPSRUWDQWIHDWXUHVRI WKHUHODWLRQVKLS)RUH[DPSOHGXULQJQRUPDOWLPHVQRQ86HTXLWLHVDUHFRQVLGHUHGWREHJRRG GLYHUVLILHUVIRU86HTXLW\LQYHVWRUV%XWGXULQJJOREDOFULVHVDOOPDMRUHTXLW\PDUNHWVPRYHGRZQ WRJHWKHU
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
3UREDELOLW\0DQDJHPHQW(QDEOHV6FHQDULR$QDO\VLV
%HFDXVH LW PD\ WDNH WKRXVDQGV RI VFHQDULRV WR DGHTXDWHO\ PRGHO UHWXUQ GLVWULEXWLRQV XQWLO UHFHQWO\DGLVDGYDQWDJHRIWKHVFHQDULREDVHGDSSURDFKKDVEHHQWKDWLWUHTXLUHVODUJHDPRXQWV RI GDWD WR EH VWRUHG DQG SURFHVVHG (YHQ ZLWK WKH DGYDQFHV LQ FRPSXWHU KDUGZDUH WKH FRQYHQWLRQDODSSURDFKRIUHSUHVHQWLQJVFHQDULRVZLWKODUJHWDEOHVRIH[SOLFLWQXPEHUVUHPDLQHG SUREOHPDWLF 7KH SKHQRPHQDO VSHHG RI FRPSXWHUV KDV JLYHQ ULVH WR WKH ILHOG RI SUREDELOLW\
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
)LQDOH7KH1HZ(IILFLHQW)URQWLHU
3XWWLQJLWDOOWRJHWKHUZHIRUPDQHIILFLHQWIURQWLHURIIRUHFDVWHGJHRPHWULFPHDQDQGFRQGLWLRQDO YDOXHDWULVNDVVKRZQLQ([KLELWLQFRUSRUDWLQJRXUVFHQDULRDSSURDFKWRFRYDULDQFHDQG QHZVWDWLVWLFDOWHFKQRORJ\:HEHOLHYHWKDWWKLVHIILFLHQWIURQWLHULVPRUHUHOHYDQWWRLQYHVWRUVWKDQ WKHWUDGLWLRQDOH[SHFWHGUHWXUQYHUVXVVWDQGDUGGHYLDWLRQIURQWLHURI092EHFDXVHLWVKRZVWKH WUDGHRII EHWZHHQ UHZDUG DQG ULVN WKDW LV PHDQLQJIXO WR LQYHVWRUV QDPHO\ ORQJWHUP SRWHQWLDO JURZWKYHUVXVVKRUWWHUPSRWHQWLDOORVV
([KLELW*HRPHWULF0HDQ±&RQGLWLRQDO9DOXHDW5LVN(IILFLHQW)URQWLHU
$SSURDFKHVWR&DOFXODWLQJWKH(TXLW\5LVN3UHPLXP
5HVHDUFKHUVKDYHHVWLPDWHGWKHH[SHFWHGRXWSHUIRUPDQFHRIVWRFNVRYHUULVNIUHHERQGV±WKH HTXLW\ULVNSUHPLXPXVLQJPDQ\DSSURDFKHV6XFKVWXGLHVFDQEHFDWHJRUL]HGLQWRIRXUJURXSV EDVHGRQWKHDSSURDFKHVWKH\KDYHWDNHQXVLQJ
• +LVWRULFDOUHWXUQVEHWZHHQVWRFNVDQGERQGV
• )XQGDPHQWDOLQIRUPDWLRQVXFKDVHDUQLQJVGLYLGHQGVRURYHUDOOSURGXFWLYLW\VXSSO\VLGH PRGHOV
2WKHUUHVHDUFKHUVKDYHDOVRSURSRVHGXVLQJ*0DQG&9D5DVWKHPHDVXUHVRUUHZDUGDQGULVNLQDQHIILFLHQWIURQWLHU6HHIRU H[DPSOH6KHLNK$= 4LDR+³1RQ1RUPDOLW\RI0DUNHW5HWXUQV$)UDPHZRUNIRU$VVHW$OORFDWLRQ'HFLVLRQ0DNLQJ´
:KLWHSDSHU-30RUJDQ$VVHW0DQDJHPHQW
&RQGLWLRQDO9DOXHDW5LVN&9D5
*HRPHWULF0HDQ
• 3D\RIIV GHPDQGHG E\ HTXLW\ LQYHVWRUV IRU EHDULQJ WKH DGGLWLRQDO ULVN GHPDQGVLGH PRGHOV
• %URDGVXUYH\VRIRSLQLRQVRIILQDQFLDOSURIHVVLRQDOV
7KHUHVWRIWKLVFKDSWHUZLOOIRFXVRQWKHKLVWRULFDODQGVXSSO\VLGHPHWKRGV
7KH+LVWRULFDO(TXLW\5LVN3UHPLXP
7KH H[SHFWHG HTXLW\ ULVN SUHPLXP (53 FDQ EH GHILQHG DV WKH DGGLWLRQDO UHWXUQ DQ LQYHVWRU H[SHFWVWRUHFHLYHWRFRPSHQVDWHIRUWKHDGGLWLRQDOULVNDVVRFLDWHGZLWKLQYHVWLQJLQHTXLWLHVDV RSSRVHGWRLQYHVWLQJLQULVNOHVVDVVHWV
8QIRUWXQDWHO\WKHH[SHFWHGHTXLW\ULVNSUHPLXPLVXQREVHUYDEOHLQWKHPDUNHWDQGWKHUHIRUHPXVW EHHVWLPDWHG7\SLFDOO\WKLVHVWLPDWLRQLVDUULYHGDWXVLQJKLVWRULFDOGDWD7KHKLVWRULFDOHTXLW\ULVN SUHPLXP FDQ EH FDOFXODWHG E\ VXEWUDFWLQJ WKH ORQJWHUP DYHUDJH RI WKH LQFRPH UHWXUQ RQWKH ULVNOHVVDVVHW7UHDVXULHVIURPWKHORQJWHUPDYHUDJHVWRFNPDUNHWUHWXUQPHDVXUHGRYHUWKH VDPHSHULRGDVWKDWRIWKHULVNOHVVDVVHW
,QXVLQJDKLVWRULFDOPHDVXUHRIWKHHTXLW\ULVNSUHPLXPRQHDVVXPHVZKDWKDVKDSSHQHGLQWKH SDVWLVUHSUHVHQWDWLYHRIZKDWPLJKWEHH[SHFWHGLQWKHIXWXUH,QRWKHUZRUGVWKHDVVXPSWLRQRQH PDNHVZKHQXVLQJKLVWRULFDOGDWDWRPHDVXUHWKHH[SHFWHGHTXLW\ULVNSUHPLXPLVWKHUHODWLRQVKLS EHWZHHQWKHUHWXUQVRIWKHULVN\DVVHWHTXLWLHVDQGWKHULVNOHVVDVVHW7UHDVXULHVLVVWDEOH
7KH6WRFN0DUNHW%HQFKPDUN
7KHVWRFNPDUNHWEHQFKPDUNFKRVHQVKRXOGEHDEURDGLQGH[WKDWUHIOHFWVWKHEHKDYLRURIWKH PDUNHWDVDZKROH&RPPRQO\XVHGLQGH[HVLQFOXGHWKH6 3DQGWKH5XVVHOO$OWKRXJK WKH'RZ-RQHV,QGXVWULDO$YHUDJHLVDSRSXODULQGH[LWZRXOGEHLQDSSURSULDWHIRUFDOFXODWLQJWKH HTXLW\ULVNSUHPLXPEHFDXVHLWLVWRRQDUURZ
:HXVHWKHWRWDOUHWXUQRIRXUODUJHFDSVWRFNLQGH[FXUUHQWO\UHSUHVHQWHGE\WKH6 3DV RXUPDUNHWEHQFKPDUNZKHQFDOFXODWLQJWKHHTXLW\ULVNSUHPLXP7KH6 3ZDVVHOHFWHG DVWKHDSSURSULDWHPDUNHWEHQFKPDUNEHFDXVHLWLVUHSUHVHQWDWLYHRIDODUJHVDPSOHRIFRPSDQLHV DFURVVDODUJHQXPEHURILQGXVWULHV7KH6 3LVDOVRRQHRIWKHPRVWZLGHO\DFFHSWHGPDUNHW EHQFKPDUNVDQGLVDJRRGPHDVXUHRIWKHHTXLW\PDUNHWDVDZKROH
([KLELW LOOXVWUDWHV WKH HTXLW\ ULVN SUHPLXP FDOFXODWHG XVLQJ WKH 6 3 DQG WKH LQFRPH UHWXUQRQWKUHHJRYHUQPHQWERQGVRIdifferentKRUL]RQV
7KH6%%,/DUJHFDS6WRFNVWRWDOUHWXUQVHULHVLVHVVHQWLDOO\WKH6 3,QGH[
([KLELW(TXLW\5LVN3UHPLD&DOFXODWHG8VLQJWKH6 3DQGWKH,QFRPH5HWXUQRQ7KUHH
*RYHUQPHQW%RQGVRI'LIIHUHQW+RUL]RQV±
6RXUFHRIXQGHUO\LQJGDWD0RUQLQJVWDU,QF8VHGZLWKSHUPLVVLRQ$OOULJKWVUHVHUYHG&DOFXODWLRQVE\' 3.UROO$VVHWFODVVHV UHSUHVHQWHGE\WKH,EERWVRQ$VVRFLDWHV,$6WRFNV%RQGV%LOOVDQG,QIODWLRQ6%%,VHULHVDVIROORZVL/DUJH&DS6WRFNV,$
6%%,86/DUJH6WRFN7586'([WLL/RQJ7HUPLH\HDU*RYHUQPHQW%RQGVLQFRPHUHWXUQVHULHV,$6%%,86/7*RYW,5 86'Y,QWHUPHGLDWHWHUPLH\HDU*RYHUQPHQW%RQGVLQFRPHUHWXUQVHULHV,$6%%,86,7*RYW,586'YL86GD\
7UHDVXU\%LOOV,$6%%,86'D\7%LOO7586'IRU867UHDVXU\%LOOVWKHLQFRPHUHWXUQDQGWRWDOUHWXUQDUHWKHVDPH)RUD GHWDLOHGGHVFULSWLRQRIWKH6%%,VHULHVVHH&KDSWHU³'HVFULSWLRQRIWKH%DVLF6HULHV´³6WRFNV%RQGV%LOOVDQG,QIODWLRQ´DQG
³6%%,´DUHUHJLVWHUHGWUDGHPDUNVRI0RUQLQJVWDU,QF$OOULJKWVUHVHUYHG8VHGZLWKSHUPLVVLRQ
1RWHWKDWWKHORQJKRUL]RQ(53LVlowerWKDQWKHLQWHUPHGLDWHKRUL]RQ(53ZKLFKLQWXUQLVlower WKDQWKHVKRUWKRUL]RQ(537KLVLVEHFDXVHWKHHTXLW\ULVNSUHPLXPLVFDOFXODWHGE\VXEWUDFWLQJ WKHDULWKPHWLFPHDQRIWKHJRYHUQPHQWERQGincomeUHWXUQIURPWKHDULWKPHWLFPHDQRIWKHVWRFN PDUNHWWRWDOUHWXUQ:KHQFDOFXODWLQJWKH(53VLQWKHVHH[DPSOHV
• 7KH DYHUDJH LQFRPH UHWXUQ RI DlongWHUP \HDU JRYHUQPHQW ERQG LV XVHG ZKHQ FDOFXODWLQJ WKH longKRUL]RQ (53 7KH DYHUDJH DQQXDO LQFRPH UHWXUQ RI \HDU JRYHUQPHQWERQGVZLOOEHgreaterWKDQWKHDYHUDJHLQFRPHUHWXUQRID\HDUJRYHUQPHQW ERQG
• 7KH DYHUDJH LQFRPH UHWXUQ RI DQintermediateWHUP \HDU JRYHUQPHQW ERQG LV XVHG ZKHQFDOFXODWLQJWKH intermediateKRUL]RQ(537KHDYHUDJHDQQXDOLQFRPHUHWXUQRI
\HDU JRYHUQPHQW ERQGV ZLOO EHgreater WKDQ WKH DYHUDJH LQFRPH UHWXUQ RI D GD\
7UHDVXU\ELOO
• 7KHDYHUDJHLQFRPHUHWXUQRID30-day7UHDVXU\ELOO LVXVHGZKHQFDOFXODWLQJWKH short KRUL]RQ(53
%HFDXVHWKH(53VLQWKHVHH[DPSOHVDUHFDOFXODWHGDV
(53 $YJ$QQXDO7RWDO5HWXUQRIWKH6 3$YJ$QQXDO,QFRPH5HWXUQRI5LVN)UHH 6HFXULW\
,W IROORZV WKDW WKH (53 ZRXOGincrease DV WKH YDOXH VXEWUDFWHG IURP WKH DYHUDJH DQQXDO WRWDO UHWXUQRIWKHVWRFNPDUNHWEHQFKPDUNdecreases
7KH0DUNHW%HQFKPDUNDQG)LUP6L]H
$OWKRXJK QRW UHVWULFWHG WR WKH ODUJHVW FRPSDQLHV WKH 6 3 LV FRQVLGHUHG D ODUJHFDS LQGH[7KHUHWXUQVRIWKH6 3DUHPDUNHWFDSZHLJKWHG7KHODUJHUFRPSDQLHVLQWKHLQGH[
WKHUHIRUHUHFHLYHWKHPDMRULW\RIWKHZHLJKW,IXVLQJDODUJHFDSLQGH[WRFDOFXODWHWKHHTXLW\ULVN SUHPLXP DQ DGMXVWPHQW LV XVXDOO\ QHHGHG WR DFFRXQW IRU WKH GLIIHUHQW ULVN DQG UHWXUQ FKDUDFWHULVWLFVRIVPDOOVWRFNVDVGLVFXVVHGLQ&KDSWHU
7KH5LVN)UHH$VVHW
7KHHTXLW\ULVNSUHPLXPFDQEHFDOFXODWHGIRUDYDULHW\RIWLPHKRUL]RQVZKHQJLYHQWKHFKRLFHRI ULVNIUHHDVVHWWREHXVHGLQWKHFDOFXODWLRQ7KHORQJKRUL]RQLQWHUPHGLDWHKRUL]RQDQGVKRUW KRUL]RQ HTXLW\ ULVN SUHPLD FDOFXODWHG LQ ([KLELW XVH WKH LQFRPH UHWXUQ IURP L D \HDU 7UHDVXU\ERQGLLD\HDU7UHDVXU\ERQGDQGLLLDGD\7UHDVXU\ELOOUHVSHFWLYHO\
<HDUYV<HDU7UHDVXULHV
7KH867UHDVXU\SHULRGLFDOO\FKDQJHVWKHPDWXULWLHVLWLVVXHV)RUH[DPSOHLQ$SULOWKH 867UHDVXU\VWRSSHGLVVXLQJ\HDU7UHDVXULHVDQGIURP2FWREHUWKURXJK-DQXDU\
WKH 86 7UHDVXU\ GLGQRW LVVXH \HDU ERQGV LW UHVXPHG LVVXLQJ \HDU 7UHDVXU\ ERQGV LQ )HEUXDU\ PDNLQJ WKH \HDU ERQG WKH ORQJHVWWHUP 7UHDVXU\ VHFXULW\ LVVXHG RYHU WKH 2FWREHU-DQXDU\SHULRG0RVWUHFHQWO\RQ-DQXDU\WKH86'HSDUWPHQWRI WKH7UHDVXU\ DQQRXQFHG LW SODQV WR LVVXH D \HDU QRPLQDO FRXSRQ ERQG LQ WKH ILUVW KDOI RI FDOHQGDU\HDUWKHILUVWWLPHD\HDUPDWXULW\ZLOOEHRIIHUHGVLQFH0DUFK
2XUPHWKRGRORJ\IRUHVWLPDWLQJWKHORQJKRUL]RQHTXLW\ULVNSUHPLXPPDNHVXVHRIWKHLQFRPH UHWXUQ RQ D \HDU 7UHDVXU\ ERQG :KLOH D \HDU ERQG LV WKHRUHWLFDOO\ PRUH FRUUHFW ZKHQ
)RU867UHDVXU\%LOOVWKHLQFRPHUHWXUQDQGWRWDOUHWXUQDUHWKHVDPH
7ROHDUQPRUHYLVLWWKH86'HSDUWPHQWRIWKH7UHDVXU\ZHEVLWHDWKWWSVKRPHWUHDVXU\JRYQHZVSUHVVUHOHDVHVVP
6HH.DWH'DYLGVRQ³7UHDVXU\WR,VVXH1HZ<HDU%RQGLQ)LUVW+DOIRI´The Wall Street Journal-DQXDU\DW KWWSVZZZZVMFRPDUWLFOHVWUHDVXU\WRLVVXHQHZ\HDUERQGLQILUVWKDOIRI
GHDOLQJZLWKWKHORQJWHUPQDWXUHRIEXVLQHVVYDOXDWLRQ\HDU7UHDVXU\VHFXULWLHVKDYHDQ LVVXDQFHKLVWRU\WKDWLVRQDJDLQRIIDJDLQ,EERWVRQ$VVRFLDWHVFUHDWHVDVHULHVRIUHWXUQVXVLQJ ERQGV RQWKH PDUNHW ZLWK DSSUR[LPDWHO\ \HDUV WR PDWXULW\ EHFDXVH 7UHDVXU\ ERQGV RI WKLV PDWXULW\DUHDYDLODEOHRYHUDORQJKLVWRU\ZKLOH7UHDVXU\ERQGVRI\HDUVDUHQRW
,QFRPH5HWXUQ$QRWKHUSRLQWWRNHHSLQPLQGZKHQFDOFXODWLQJWKHHTXLW\ULVNSUHPLXPLVWKH LQFRPHUHWXUQRQWKHDSSURSULDWHKRUL]RQ7UHDVXU\VHFXULW\UDWKHUWKDQWKHWRWDOUHWXUQLVXVHG LQWKHFDOFXODWLRQ
7KHWRWDOUHWXUQFRPSULVHVWKUHHUHWXUQFRPSRQHQWVWKHLQFRPHUHWXUQWKHFDSLWDODSSUHFLDWLRQ UHWXUQDQGWKHUHLQYHVWPHQWUHWXUQ7KHLQFRPHUHWXUQLVGHILQHGDVWKHSRUWLRQRIWKHWRWDOUHWXUQ WKDW UHVXOWV IURP D SHULRGLF FDVK IORZ RU LQ WKLV FDVH WKH ERQG FRXSRQ SD\PHQW 7KH FDSLWDO DSSUHFLDWLRQUHWXUQUHVXOWVIURPWKHSULFHFKDQJHRIDERQGRYHUDVSHFLILFSHULRG%RQGSULFHV JHQHUDOO\FKDQJHLQUHDFWLRQWRXQH[SHFWHGIOXFWXDWLRQVLQ\LHOGV5HLQYHVWPHQWUHWXUQLVWKHUHWXUQ RQ D JLYHQ PRQWK¶V LQYHVWPHQW LQFRPH ZKHQ UHLQYHVWHG LQWR WKH VDPH DVVHW FODVV LQ WKH VXEVHTXHQWPRQWKVRIWKH\HDU7KHLQFRPHUHWXUQLVWKXVXVHGLQWKHHVWLPDWLRQRIWKHHTXLW\ULVN SUHPLXPEHFDXVHLWUHSUHVHQWVWKHWUXO\ULVNOHVVSRUWLRQRIWKHUHWXUQ
$ULWKPHWLFYV*HRPHWULF0HDQ
7KH HTXLW\ ULVN SUHPLXP GDWD SUHVHQWHG LQ WKLVERRN DUH DULWKPHWLF DYHUDJH ULVN SUHPLXPV DV RSSRVHGWRJHRPHWULFDYHUDJHULVNSUHPLXPV7KHDULWKPHWLFDYHUDJHHTXLW\ULVNSUHPLXPFDQEH GHPRQVWUDWHGWREHPRVWDSSURSULDWHZKHQGLVFRXQWLQJIXWXUHFDVKIORZV)RUXVHDVWKHH[SHFWHG HTXLW\ULVNSUHPLXPLQHLWKHUWKH&$30RUWKHEXLOGLQJEORFNDSSURDFKWKHDULWKPHWLFPHDQRU WKHVLPSOHGLIIHUHQFHRIWKHDULWKPHWLFPHDQVRIVWRFNPDUNHWUHWXUQVDQGULVNOHVVUDWHVLVWKH UHOHYDQWQXPEHU
7KLVLVEHFDXVHERWKWKH&$30DQGWKHEXLOGLQJEORFNDSSURDFKDUHDGGLWLYHPRGHOVLQZKLFK WKHFRVWRIFDSLWDOLVWKHVXPRILWVSDUWV7KHJHRPHWULFDYHUDJHLVPRUHDSSURSULDWHIRUUHSRUWLQJ SDVWSHUIRUPDQFHEHFDXVHLWUHSUHVHQWVWKHFRPSRXQGDYHUDJHUHWXUQ
$SSURSULDWH+LVWRULFDO3HULRG
7KHHTXLW\ULVNSUHPLXPFDQEHHVWLPDWHGXVLQJDQ\KLVWRULFDOWLPHSHULRG)RUWKH86PDUNHW GDWDH[LVWDWOHDVWDVIDUEDFNDVWKHODWHV7KHUHIRUHLWLVSRVVLEOHWRHVWLPDWHWKHHTXLW\
ULVNSUHPLXPXVLQJGDWDWKDWFRYHUVURXJKO\WKHSDVW\HDUV
$QHTXLW\ULVNSUHPLXPLVDQLQSXWLQGHYHORSLQJFRVWRIFDSLWDOHVWLPDWHVLH³H[SHFWHGUHWXUQ´³UHTXLUHGUHWXUQ´RU³GLVFRXQW UDWH´IRUXVHLQDGLVFRXQWHGFDVKIORZPRGHO1RWH7KH' 3.UROO³&RVWRI&DSLWDO1DYLJDWRU´JXLGHVILQDQFLDOSURIHVVLRQDOV WKURXJKWKHSURFHVVRIHVWLPDWLQJWKHFRVWRIFDSLWDODNH\FRPSRQHQWRIDQ\YDOXDWLRQDQDO\VLV7KH&RVWRI&DSLWDO1DYLJDWRU FDQEHXVHGWRHVWLPDWHFRXQWU\OHYHOFRVWRIHTXLW\FDSLWDOJOREDOO\IRUDSSUR[LPDWHO\FRXQWULHVIURPWKHSHUVSHFWLYHRI LQYHVWRUVEDVHGLQDQ\RQHRIXSWRFRXQWULHV)RUPRUHLQIRUPDWLRQYLVLWGSFRVWRIFDSLWDOFRP
2XUHTXLW\ULVNSUHPLXPFRYHUVWRWKHSUHVHQW7KHRULJLQDOGDWDVRXUFHIRUWKHWLPHVHULHV FRPSULVLQJ WKH HTXLW\ ULVN SUHPLXP LV WKH &HQWHU IRU 5HVHDUFK LQ 6HFXULW\ 3ULFHV &563
&563 FKRVH WR EHJLQ LWV DQDO\VLV RI PDUNHW UHWXUQV ZLWK IRU WZR PDLQ UHDVRQV &563 GHWHUPLQHGWKDWZDVDSSUR[LPDWHO\ZKHQTXDOLW\ILQDQFLDOGDWDEHFDPHDYDLODEOH7KH\DOVR PDGHDFRQVFLRXVHIIRUWWRLQFOXGHWKHSHULRGRIH[WUHPHPDUNHWYRODWLOLW\IURPWKHODWHVDQG HDUO\ V ZDV FKRVHQ EHFDXVH LW LQFOXGHV RQH IXOO EXVLQHVV F\FOH RI GDWD EHIRUH WKH PDUNHWFUDVKRI
,PSOLFLWLQXVLQJKLVWRU\WRIRUHFDVWWKHIXWXUHLVWKHDVVXPSWLRQWKDWLQYHVWRUV¶H[SHFWDWLRQVIRU IXWXUHRXWFRPHVFRQIRUPWRSDVWUHVXOWV7KLVPHWKRGDVVXPHVWKDWWKHSULFHRIWDNLQJRQULVN FKDQJHVRQO\VORZO\LIDWDOORYHUWLPH7KLV³IXWXUHHTXDOVWKHSDVW´DVVXPSWLRQLVPRVWDSSOLFDEOH WRDUDQGRPWLPHVHULHVYDULDEOH$WLPHVHULHVYDULDEOHLVUDQGRPLILWVYDOXHLQRQHSHULRGLV LQGHSHQGHQWRILWVYDOXHLQRWKHUSHULRGV
&KRRVLQJDQ$SSURSULDWH+LVWRULFDO3HULRG
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
6RPHDQDO\VWVHVWLPDWHWKHH[SHFWHGHTXLW\ULVNSUHPLXPXVLQJDVKRUWHUPRUHUHFHQWSHULRGRQ WKHEDVLVWKDWUHFHQWHYHQWVDUHPRUHOLNHO\WREHUHSHDWHGLQWKHQHDUIXWXUHIXUWKHUPRUHWKH\
EHOLHYHWKDWWKHVVDQGVFRQWDLQWRRPDQ\XQXVXDOHYHQWV7KLVYLHZLVVXVSHFW EHFDXVHDOOSHULRGVFRQWDLQXQXVXDOHYHQWV6RPHRIWKHPRVWXQXVXDOHYHQWVRIWKHODVW
\HDUV WRRN SODFH TXLWH UHFHQWO\ LQFOXGLQJ WKH LQIODWLRQ RI WKH ODWH V DQG HDUO\ V WKH 2FWREHU VWRFN PDUNHW FUDVK WKH FROODSVH RI WKH KLJK\LHOG ERQG PDUNHW WKH PDMRU FRQWUDFWLRQ DQG FRQVROLGDWLRQ RI WKH WKULIW LQGXVWU\ WKH FROODSVH RI WKH 6RYLHW 8QLRQ WKH GHYHORSPHQWRIWKH(XURSHDQ(FRQRPLF&RPPXQLW\WKHDWWDFNVRI6HSWWKHJOREDO ILQDQFLDOFULVLVRI±DQGPRVWUHFHQWO\WKHPDUNHWFUDVKLQWKHILUVWTXDUWHURIWKDW ZDVSUHFLSLWDWHGE\WKHVSUHDGRIWKH&29,'YLUXV
,W LV HYHQ PRUH GLIILFXOW IRU HFRQRPLVWV WR SUHGLFW WKH HFRQRPLF HQYLURQPHQW RI WKH IXWXUH )RU H[DPSOHLIRQHZHUHDQDO\]LQJWKHVWRFNPDUNHWLQEHIRUHWKHFUDVKLWZRXOGEHVWDWLVWLFDOO\
LPSUREDEOH WR SUHGLFW WKH LPSHQGLQJ VKRUWWHUP YRODWLOLW\ ZLWKRXW FRQVLGHULQJ WKH VWRFN PDUNHW FUDVKDQGPDUNHWYRODWLOLW\RIWKHSHULRG
&563LVDUHJLVWHUHGWUDGHPDUNDQGVHUYLFHPDUNRI&HQWHUIRU5HVHDUFKLQ6HFXULW\3ULFHV//&DQGKDVEHHQOLFHQVHGIRUXVH E\' 3.UROO7KH' 3.UROOSXEOLFDWLRQVDQGVHUYLFHVDUHQRWVSRQVRUHGVROGRUSURPRWHGE\&563LWVDIILOLDWHVRULWVSDUHQW FRPSDQ\7ROHDUQPRUHDERXW&563YLVLWZZZFUVSFRP
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
$/RRNDWWKH+LVWRULFDO5HVXOWV
,WLVLQWHUHVWLQJWRORRNDWWKHUHDOL]HGUHWXUQVDQGUHDOL]HGHTXLW\ULVNSUHPLXPLQWKHFRQWH[WRI WKH DERYH GLVFXVVLRQ VLQFH D ORQJHU KLVWRULFDO SHULRG SURYLGHV D PRUH VWDEOH HVWLPDWH RI WKH HTXLW\ ULVN SUHPLXP 7KH UHDVRQ LV WKDW DQ\ XQLTXH SHULRG ZLOO QRW EH ZHLJKWHG KHDYLO\ LQ DQ DYHUDJHFRYHULQJDORQJHUKLVWRULFDOSHULRG,WEHWWHUUHSUHVHQWVWKHSUREDELOLW\RIWKHVHXQLTXH HYHQWVRFFXUULQJRYHUDORQJSHULRGRIWLPH
([KLELWKHOSVWRFODULI\WKLVSRLQW([KLELWVKRZVWKHUHDOL]HGHTXLW\ULVNSUHPLXPIRUD VHULHVRISHULRGVWKURXJKVWDUWLQJZLWK,QRWKHUZRUGVWKHILUVWYDOXHRQWKHJUDSK UHSUHVHQWVWKHDYHUDJHUHDOL]HGHTXLW\ULVNSUHPLXPRYHUWKHSHULRG±7KHQH[WYDOXH RQWKHJUDSKUHSUHVHQWVWKHDYHUDJHUHDOL]HGHTXLW\ULVNSUHPLXPRYHUWKHSHULRG±
DQGVRRQZLWKWKHULJKWPRVWYDOXHUHSUHVHQWLQJWKHDYHUDJHIRUDVLQJOH\HDU
&RQFHQWUDWLQJRQWKHOHIWVLGHRI([KLELWRQHQRWLFHVWKDWWKHUHDOL]HGHTXLW\ULVNSUHPLXP ZKHQPHDVXUHGRYHUlonger SHULRGVLVUHODWLYHO\VWDEOHDQGKDVDVWDQGDUGGHYLDWLRQRI
$OWHUQDWLYHO\WKHUHDOL]HGHTXLW\SUHPLDRQWKHULJKWVLGHRI([KLELWDUHPHDVXUHGRYHUshorter SHULRGVDUHOHVVVWDEOHDQGKDYHDVWDQGDUGGHYLDWLRQRI
,IWKHXQXVXDOO\ODUJHUHDOL]HGHTXLW\ULVNSUHPLDPHDVXUHGRYHUWKH\HDUV±DQGWKHVLQJOH\HDUDUH H[FOXGHGWKHULJKWPRVWWZREDUVLQ([KLELWWKHVWDQGDUGGHYLDWLRQRIWKHUHDOL]HGHTXLW\ULVNSUHPLDPHDVXUHGZLWKVWDUWLQJ GDWHV±GURSVWR7KLVLVVWLOOPRUHWKDQWZLFHWKHVWDQGDUGGHYLDWLRQRIWKHUHDOL]HGHTXLW\ULVNSUHPLDPHDVXUHG ZLWKVWDUWLQJGDWHV±WKHOHIWVLGHRI([KLELWRI
([KLELW$YHUDJH/RQJ+RUL]RQ(TXLW\5LVN3UHPLXP&DOFXODWHG8VLQJ9DULDEOH6WDUW'DWHV
±DQG)L[HG(QG'DWH
6RXUFHRIXQGHUO\LQJGDWD0RUQLQJVWDU,QF8VHGZLWKSHUPLVVLRQ$OOULJKWVUHVHUYHG&DOFXODWLRQVE\' 3.UROO$VVHWFODVVHV UHSUHVHQWHGE\WKH,EERWVRQ$VVRFLDWHV,$6WRFNV%RQGV%LOOVDQG,QIODWLRQ6%%,VHULHVDVIROORZVL/DUJH&DS6WRFNV,$
6%%,86/DUJH6WRFN7586'([WDQGLL/RQJ7HUPLH\HDU*RYHUQPHQW%RQGVLQFRPHUHWXUQVHULHV,$6%%,86/7*RYW ,586')RUDGHWDLOHGGHVFULSWLRQRIWKH6%%,VHULHVVHH&KDSWHU³'HVFULSWLRQRIWKH%DVLF6HULHV´³6WRFNV%RQGV%LOOVDQG ,QIODWLRQ´DQG³6%%,´DUHUHJLVWHUHGWUDGHPDUNVRI0RUQLQJVWDU,QF$OOULJKWVUHVHUYHG8VHGZLWKSHUPLVVLRQ
6RPHSUDFWLWLRQHUVDUJXHIRUDVKRUWHUKLVWRULFDOSHULRGVXFKDV\HDUVDVDEDVLVIRUWKHHTXLW\
ULVNSUHPLXPHVWLPDWLRQ7KHORJLFIRUWKHXVHRIDVKRUWHUSHULRGLVWKDWKLVWRULFDOHYHQWVDQG HFRQRPLFVFHQDULRVSUHVHQWEHIRUHWKLVWLPHDUHXQOLNHO\WREHUHSHDWHG+RZHYHUWKHLPSDFWRI DGGLQJRQHDGGLWLRQDO\HDURIGDWDWRDKLVWRULFDODYHUDJHLVlessened WKHgreater WKHLQLWLDOSHULRG RI PHDVXUHPHQW $V LV GHPRQVWUDWHG LQ ([KLELW VKRUWHUWHUP DYHUDJHV FDQ EH DIIHFWHG FRQVLGHUDEO\E\RQHRUPRUHXQLTXHREVHUYDWLRQVZKLOHORQJHUWHUPDYHUDJHVWHQGWRSURGXFH PRUHVWDEOHUHVXOWV
$GUDPDWLFH[DPSOHRIWKLVLVWKHVHFRQGULJKWPRVWSRLQWLQ([KLELWZKLFKLVWKH³DYHUDJH´
(53DVPHDVXUHGRYHUDVLQJOH\HDU,QODUJHFDSVWRFNVUHSUHVHQWHGE\WKH6 3 SURGXFHGDWRWDOUHWXUQRIRYHUDQGWKHLQFRPHUHWXUQRIORQJWHUPJRYHUQPHQWERQGV ZDVLPSO\LQJDQ³DYHUDJH´(53RI8VLQJDQHVWLPDWHRIWKH (53GHYHORSHGRYHUVXFKDVKRUWWLPHKRUL]RQLVORJLFDORQO\WRWKHH[WHQWWKDWRQHEHOLHYHVWKDW VWRFNVZLOORXWSHUIRUPWKHULVNIUHHLQVWUXPHQWE\QHDUO\SHU\HDULQSHUSHWXLW\
+DYLQJVDLGWKDWWKHHIIHFWRI³DGGLQJRQHDGGLWLRQDO\HDU´ZKHQXVLQJKLVWRULFDOGDWDWRHVWLPDWH WKH(53FDQVWLOOOHDGWRFRXQWHULQWXLWLYHFRQFOXVLRQVHYHQZKHQWKHDYHUDJHLVWDNHQRYHUlonger
2016
6WDUWLQJ 'DWH
±6WDUW'DWHV
\HDUV
6WDQGDUG'HYLDWLRQ ±6WDUW'DWHV
\HDUV
6WDQGDUG'HYLDWLRQ