Joining Lifecycle Models with Mean-Variance Optimization
22 Pages Posted: 18 Jun 2023 Last revised: 19 Oct 2023
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
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