Terminal Wealth Problem Under Uncertainty: How to Choose the Right Asset Mix in Case of Dependent Random Payments
31 Pages Posted: 6 Mar 2007
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
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