Joining Lifecycle Models with Mean-Variance Optimization

22 Pages Posted: 18 Jun 2023 Last revised: 19 Oct 2023

See all articles by Paul D. Kaplan

Paul D. Kaplan

Morningstar Canada

Thomas M. Idzorek

Morningstar Investment Management

Date Written: October 18, 2023

Abstract

For nearly three quarters of a century, the lifecycle models stemming from Fisher (1930), Friedman (1957), Modigliani (1966), Samuelson (1969), Merton (1969, 1971, 1992), and others, and the single-period optimization models of Roy (1952), Tobin (1958), and Markowitz (1952, 1959, 1987) have largely remained separate; let alone, have they been brought together in a meaningful way. Building on the insights of Samuelson (1969) and Fama (1970) and methods developed by Idzorek and Kaplan (2023), using the utility function of Levy and Markowitz (1979) and the investor’s balance sheet, we link lifecycle models and mean-variance optimization models into a combined, integrated model that simultaneously provide the financial planning answers of lifecycle finance (e.g. consumption, life insurance, annuities) with the portfolio recommendations of single-period optimization models.

Keywords: lifecycle finance; mean-variance optimization

Suggested Citation

Kaplan, Paul D. and Idzorek, Thomas, Joining Lifecycle Models with Mean-Variance Optimization (October 18, 2023). Available at SSRN: https://ssrn.com/abstract=4474977 or http://dx.doi.org/10.2139/ssrn.4474977

Paul D. Kaplan

Morningstar Canada ( email )

1 Toronto Street
Suite 500
Toronto, Ontario M5C 2W4
Canada

Thomas Idzorek (Contact Author)

Morningstar Investment Management ( email )

22 W Washington Street
Chicago, IL 60602
United States

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