6533b870fe1ef96bd12d0800
RESEARCH PRODUCT
Scenario optimization asset and liability modelling for individual investors
Andrea ConsiglioFlavio CoccoStavros A. ZeniosAndrea ConsiglioFlavio CoccoStavros A. Zeniossubject
Application portfolio managementComputer scienceLiabilityDownside riskGeneral Decision SciencesAsset allocationAsset and liability managementTime horizonManagement Science and Operations ResearchAsset returnBlack–Litterman modelMicroeconomicsReplicating portfolioPortfolioCapital asset pricing modelPost-modern portfolio theoryPortfolio optimizationPersonal asset allocation stochastic programmingBeta (finance)Upside potential ratiodescription
We develop a scenario optimization model for asset and liability management of individual investors. The individual has a given level of initial wealth and a target goal to be reached within some time horizon. The individual must determine an asset allocation strategy so that the portfolio growth rate will be sufficient to reach the target. A scenario optimization model is formulated which maximizes the upside potential of the portfolio, with limits on the downside risk. Both upside and downside are measured vis- `a-vis the goal. The stochastic behavior of asset returns is captured through bootstrap simulation, and the simulation is embedded in the model to determine the optimal portfolio. Post-optimality analysis using out-of-sample scenarios measures the probability of success of a given portfolio. It also allows us to estimate the required increase in the initial endowment so that the probability of success is improved.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2006-11-10 |