The Role of Options in Goals-Based Wealth Management
29 Pages Posted: 21 Oct 2020 Last revised: 6 Jul 2021
Date Written: September 12, 2020
We develop a facile methodology using dynamic programming for goals-based wealth management over long horizons where rebalancing uses the standard securities and also derivative securities. A kernel density estimation approach is developed to accommodate any number of derivative assets, solving a high dimensional problem with fast computation. The approach easily accommodates skewed and fat-tailed distributions. Portfolio performance is much better with the use of options, especially for investors with aggressive goals.
Keywords: Options, goal-based investing, dynamic programming
JEL Classification: G11, G13
Suggested Citation: Suggested Citation