Surplus Risk and Return: Equivalence of Asset- and Liability-Centric Views

Abstract

Surplus risk and return are not accounting measures but economic magnitudes. As the initial surplus can be zero, surplus return cannot be measured with the standard accounting logic in return measurement. Once surplus return is properly measured, standard risk measurement approaches can be used to quantify surplus risk. Whether surplus return is measured “asset-centric” or “liability-centric” is a reporting issue; we show that investment decisions are not affected how surplus is reported.

Keywords: surplus, surplus return, surplus risk, surplus optimization, return measurement