What does one estimate in the surplus optimization process after selecting asset categories?

In the surplus optimization process, once asset categories have been selected, the focus shifts to estimating expected returns and volatilities for those asset categories as well as for liabilities. This estimation is critical because it determines how the selected assets will perform relative to the liabilities of the entity, ensuring that the investment strategy adequately meets future obligations.

By understanding the expected returns, investors can assess whether the chosen asset categories will generate sufficient income to cover future liabilities. Similarly, calculating the volatilities helps in assessing the risk involved in holding these assets. This dual analysis is vital for managing the surplus effectively, as it allows for a well-informed decision on how to balance risk and return in alignment with the objectives of the investment strategy.

Other factors such as legal implications, risk premiums, investor sentiment, and economic forecasts may influence the broader context of investment decisions, but they do not form the core estimates needed in the surplus optimization process once asset categories are in place. Thus, the emphasis on expected returns and volatilities directly ties to the financial health and planning of the organization.