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A two-stage approach to multi-period allocation of savings among investment plans

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Abstract

This paper presents a two-stage multi-period decision model for allocation of the individual's savings into several investment plans. Although the U.S. economy is used as the background, the modelling methods are general enough to accommodate any tax law. The first stage of the model uses an asset-allocation method based on the single-index model. Because this method is static and does not provide for tax considerations and other constraints, it alone is not enough. The output of this optimal selection is used as exogenous parameters and controls for the second stage of the model which is an integer program. The IP includes fixed charges, statutory and budgetary constraints, a discount rate, and the risk level. We provide an example of this approach to illustrate how an individual can achieve his goals of terminal accumulations while maintaining the risk level, measured by the aggregate beta, he prefers. A linear programming relaxation of the IP model is utilized for sensitivity analysis to examine whether future adjustments in investment strategies are required. The model remains tractable enough for implementation by individuals who may not be experts in mathematical programming and financial planning.

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Authors and Affiliations

  1. Department of Management, La Salle University, 19141, Philadelphia, PA, USA

    Patrick S. Lee

  2. Anderson Schools of Management, University of New Mexico, 87131, Albuquerque, NM, USA

    Gautam Vora

Authors
  1. Patrick S. Lee
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  2. Gautam Vora
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Lee, P.S., Vora, G. A two-stage approach to multi-period allocation of savings among investment plans. Ann Oper Res 45, 221–242 (1993). https://doi.org/10.1007/BF02282051

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