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P-Solve's Risk Management Solutions business provides derivative solutions and advice. Financial derivatives are not suitable for all investors. Losses may be substantial and may exceed the amount invested.

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Shaping Equity Returns

What do we want from our equity investment? In an ideal world we would want to keep the long term returns that equities generate but remove/manage the risk associated with those returns. In this section we are going to look at a number of ways to use derivatives manage better the types of returns you can achieve with you equity investments.

What do we mean by shaping equity returns? To illustrate the concept of shaping equity returns, let's look at the return an investment provides. The chart to the right shows the return on an equity portfolio for different levels of the FTSE 100 index. We have assumed the current level of the FTSE is 5500.
	The suitability of this return profile depends upon your objectives and risk tolerances. Let’s look specifically at an example where the trustees’ risk tolerance means that they may not be able to afford to lose more than 5% from the equity assets. For these requirements the desired return profile looks like the graph to the left.
This profile provides the perfect return for this set of trustees – i.e. it provides all of the upside of equities whilst removing the chance of losing more than 5%. In reality, this return profile is only achievable by purchasing insurance which costs money. Therefore, when taking into account the cost of this insurance, the overall return from equities is reduced by the insurance premium as shown right.

Try shaping your own Equity