Abstract
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-à-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.
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Consiglio, A., Cocco, F. & Zenios, S.A. Scenario optimization asset and liability modelling for individual investors. Ann Oper Res 152, 167–191 (2007). https://doi.org/10.1007/s10479-006-0133-5
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DOI: https://doi.org/10.1007/s10479-006-0133-5