SaR is the shorthand of "Surplus at Risk". There is an through explanation on the DH's site here.....
There is an interesting question I just read...
Company ABC asset management has liabilities of USD 100 million and assets of USD 120 million.
The anual growth of the liabilities has an expected value of 5% with 3% volatility. The annual return of the
assets has an expected value of 8% with 12% volatility. The correlation between asset and liability is 0.3.
What is the 95% Surplus at Risk? the answer os USD 18.1 million.
(It use the definition of portfolio combination to have the mean and SD,then apply the relative sense of
VaR to have the result...)
I try to use the definition of
Incremental Surplus= (Incremental Assets - Incremental Liabilities)/Asset
=(Incremental assets/Assets)-(Incremental Liabilities/Liabilities)*(L/A)
So I have
Variance(Incremental Surplus)=0.01323 -> sigma(Incremental Surplus)=0.115
It leads Surplus at Risk (in Absolute sense) to 120*0.115*1.65=13.8 million... the answer is (c) not (D)...
What goes wrong??