SCR Calculator User Manual

Version 1.13.2.0 Last modified 2024-3-21

Step 5. Add Verbal Constraint(s)

Sometimes we want to define relations between asset class weights. This is where setting verbal constraints becomes necessary.

Let's make 3 changes in the constraint setting panel:

  • Relax the SCR Spread constraint to 0.08 to allow for additional capital headroom:
  • Keep the combined weight of [EUR + US] HY to be <= 1/10 of the combined weight of [AA + A + BBB] corporate bonds. To do this, switch to the "Verbal Constraint" tab, use "control + click" to multi-select items, and enter coefficients, like below. Click the double right arrow button, a verbal constraint will be added in the right-hand-side box.
  • Keep the combined weight of [EUR + US] HY to be <= 0.05 of the total portfolio. To do this, enter the settings like below, and click the double right arrow again, another verbal constraint will be added in the right-hand-side box.

The two small boxes in the middle are constant addition and multiplication parameters, respectively.

In general, you can add multiple verbal constraints this way, each on a new line. You can manually edit what's in the right-hand-side box, but normally you don't need to do so; and manual editing is error-prone so not recommended.

Now reclick the "Run EF" button, and a EF #3 (red) will be generated. It is between EF #1 and EF #2:

EF #3 is under a set of constraints that are a close reflection of our actual allocation policy in terms of risk appetite and capital budget. If we investigate its underlying allocations at the mid-to-high target return level (in the Stacked Area chart), we notice that EUR HY allocaton (light blue) tends to dominate over US HY (brown).

Thus the key finding is clear: EUR HY is better for our balance sheet than US HY, based on 1) historical asset correlations and volatilities 2) forward-looking expected returns and 3) our risk/return/capital objectives and constraints.