Terminal Wealth Problem Under Uncertainty: How to Choose the Right Asset Mix in Case of Dependent Random Payments

31 Pages Posted: 6 Mar 2007

See all articles by Ales Ahcan

Ales Ahcan

University of Ljubljana - Faculty of Economics

Grzegorz Darkiewicz

KU Leuven - Faculty of Business and Economics (FEB)

Tom Hoedemakers

KU Leuven - Faculty of Business and Economics (FEB)

Abstract

We develop an approximate solution method for a classical saving for retirement problem in case of random payment scheme and VAR defined investor preferences. As the results of our numerical calculations indicate our approximate approach facilitates greater accuracy and reduces simulation time required for computing certain risk measures. As the results indicate with increasing volatility of payments one should even under a conservative objective function switch to riskier portfolios; the reason being that in a volatile environment with no correlation of payments and yearly returns, some of the downside of below average payments is compensated by higher expected gains from riskier investment strategies.

Keywords: portfolio selection, constant mix strategy, Black&Scholes model, ALM, comonotonicity

JEL Classification: G11, C60

Suggested Citation

Ahcan, Ales and Darkiewicz, Grzegorz and Hoedemakers, Tom, Terminal Wealth Problem Under Uncertainty: How to Choose the Right Asset Mix in Case of Dependent Random Payments. Available at SSRN: https://ssrn.com/abstract=968211 or http://dx.doi.org/10.2139/ssrn.968211

Ales Ahcan (Contact Author)

University of Ljubljana - Faculty of Economics ( email )

Kardeljeva ploscad 17
Ljubljana, 1000
Slovenia

Grzegorz Darkiewicz

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Tom Hoedemakers

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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