MQP 2011-Simulating Tracking Error in Variable Annuities

Our project analyzed the standard deviation of projected mutual fund returns relative to the actual performance of the mutual fund. We performed Monte-Carlo simulations using geometric Brownian motion to obtain the projected mutual funds. Our project tested the effects of a regime-switching model and distribution of manager’s alpha by generating many scenarios to draw conclusions about fund mapping accuracy. Using our results, we analyzed the specific effects of these variables to provide conclusions to our sponsor, Towers Watson.