Surplus volatility

The volatility of assets minus liabilities, the risk that matters to an investor who owes something. Cash looks risk-free on its own but can carry a lot of it when the liabilities behave like long bonds.

Where you will meet it

Surplus volatility appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Contrast how risk is defined when allocating on a goals-based, liability-relative or asset-only basis
  CFA Level III · Asset Allocation

  “The trap is calling cash risk-free for a pension plan: against long-duration liabilities cash creates large surplus volatility.”

• Propose and defend an asset allocation designed around a set of liabilities
  CFA Level III · Asset Allocation

  “A good justification states the hedge ratio, explains how surplus volatility is controlled, and links the return-seeking size to the funding gap.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with S · Glossary