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Optimal portfolio selection for general provisioning and terminal wealth problems

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  • Van Weert, Koen
  • Dhaene, Jan
  • Goovaerts, Marc

Abstract

In Dhaene et al. (2005), multiperiod portfolio selection problems are discussed, using an analytical approach to find optimal constant mix investment strategies in a provisioning or a savings context. In this paper we extend some of these results, investigating some specific, real-life situations. The problems that we consider in the first section of this paper are general in the sense that they allow for liabilities that can be both positive or negative, as opposed to Dhaene et al. (2005), where all liabilities have to be of the same sign. Secondly, we generalize portfolio selection problems to the case where a minimal return requirement is imposed. We derive an intuitive formula that can be used in provisioning and terminal wealth problems as a constraint on the admissible investment portfolios, in order to guarantee a minimal annualized return. We apply our results to optimal portfolio selection.

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Bibliographic Info

Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

Volume (Year): 47 (2010)
Issue (Month): 1 (August)
Pages: 90-97

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Handle: RePEc:eee:insuma:v:47:y:2010:i:1:p:90-97

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Web page: http://www.elsevier.com/locate/inca/505554

Related research

Keywords: IM10 Portfolio selection Comonotonicity Provisioning Terminal wealth Minimal return requirement;

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References

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  1. J. Dhaene & S. Vanduffel & M. J. Goovaerts & R. Kaas & D. Vyncke, 2005. "Comonotonic Approximations for Optimal Portfolio Selection Problems," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(2), pages 253-300.
  2. Dhaene, J. & Denuit, M. & Goovaerts, M. J. & Kaas, R. & Vyncke, D., 2002. "The concept of comonotonicity in actuarial science and finance: theory," Insurance: Mathematics and Economics, Elsevier, vol. 31(1), pages 3-33, August.
  3. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Huang, H. & Milevsky, M. A. & Wang, J., 2004. "Ruined moments in your life: how good are the approximations?," Insurance: Mathematics and Economics, Elsevier, vol. 34(3), pages 421-447, June.
  5. Dhaene, J. & Denuit, M. & Goovaerts, M. J. & Kaas, R. & Vyncke, D., 2002. "The concept of comonotonicity in actuarial science and finance: applications," Insurance: Mathematics and Economics, Elsevier, vol. 31(2), pages 133-161, October.
  6. Cesari, Riccardo & Cremonini, David, 2003. "Benchmarking, portfolio insurance and technical analysis: a Monte Carlo comparison of dynamic strategies of asset allocation," Journal of Economic Dynamics and Control, Elsevier, vol. 27(6), pages 987-1011, April.
  7. Milevsky, Moshe Arye & Posner, Steven E., 1998. "Asian Options, the Sum of Lognormals, and the Reciprocal Gamma Distribution," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 409-422, September.
  8. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  9. Kaas, Rob & Dhaene, Jan & Goovaerts, Marc J., 2000. "Upper and lower bounds for sums of random variables," Insurance: Mathematics and Economics, Elsevier, vol. 27(2), pages 151-168, October.
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Citations

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Cited by:
  1. Dhaene, Jan & Goovaerts, Marc & Vanmaele, Michèle & Van Weert, Koen, 2012. "Convex order approximations in the case of cash flows of mixed signs," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 249-256.
  2. Leung, Andrew P., 2011. "Reactive investment strategies," Insurance: Mathematics and Economics, Elsevier, vol. 49(1), pages 89-99, July.

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