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ANDREA CONSIGLIO

Scenario Optimization Asset and Liability Modelling for Individual Investors

  • Autori: CONSIGLIO ANDREA; COCCO F; ZENIOS SA
  • Anno di pubblicazione: 2007
  • Tipologia: Articolo in rivista (Articolo in rivista)
  • OA Link: http://hdl.handle.net/10447/23441

Abstract

We develop a scenario optimization model for asset and liability management of individual investors. The individual has a given level of initial wealth and a target goal to be reached within some time horizon. The individual must determine an asset allocation strategy so that the portfolio growth rate will be sufficient to reach the target. A scenario optimization model is formulated which maximizes the upside potential of the portfolio, with limits on the downside risk. Both upside and downside are measured vis- `a-vis the goal. The stochastic behavior of asset returns is captured through bootstrap simulation, and the simulation is embedded in the model to determine the optimal portfolio. Post-optimality analysis using out-of-sample scenarios measures the probability of success of a given portfolio. It also allows us to estimate the required increase in the initial endowment so that the probability of success is improved.