## Figure 2.3.1. Risk-Return Trade-off and Expected Times to Exit Underfunding

## Source details

**Canonical URL:** [Figure 2.3.1. Risk-Return Trade-off and Expected Times to Exit Underfunding](https://www.imf.org/-/media/files/publications/gfsr/2017/april/boxfigure2-3-1r3.pdf)

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### Funding ratio dynamics and expected times to exit underfunding
- 1. Funding Ratio (Percent)
- Years tick marks shown: 0, 5, 10, 15, 20, 25, 30, 35, 40
- Funding ratio vertical ticks shown: 60, 70, 80, 90, 100, 110, 120
- Observations from figure captions:
  - High-equity strategies can return a pension fund to solvency, but a high-bond strategy cannot.
  - High-equity strategies entail very high levels of risk, which can result in insolvency.

### Risk measures and Value at Risk
- 2. Value at Risk at 95 Percent Confidence Level (Percent of initial funding ratio)
- Risk axis tick marks shown as: 0, 2, 4, 6, 8, 10, 12 (displayed as "024681012")
- VaR level indicated: 5%

### Strategy labels shown on figure
- High equity
- Balanced
- High bonds
- VaR (5%)

### Key visual relationships depicted
- Expected time to exit underfunding is plotted against Years for three strategies: High equity, Balanced, High bonds.
- Risk (percent) profile is shown for the three strategies, with High equity exhibiting the highest risk, Balanced intermediate risk, and High bonds the lowest risk.
- The figure conveys a trade-off: higher expected return strategies (High equity) can achieve solvency but carry higher VaR and insolvency risk; lower-risk strategies (High bonds) do not restore solvency in the scenario depicted.

*Sources: Bloomberg L.P.; Thomson Reuters Datastream; and IMF staff calculations.*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2017/april/boxfigure2-3-1r3.pdf_