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Asset and Liability Management: Recent Advances
Published in George Anastassiou, Handbook of Analytic-Computational Methods in Applied Mathematics, 2019
Managing assets and liabilities is a concern for banks, pension funds and insurance companies. Before the deregulation of interest rates, the market value of liabilities changed very little from year to year. However, after interest rates were deregulated in 1979, they showed much more volatility. This lead the institutional investors mentioned above to consider assets and liabilities simultaneously during their strategic planning. Strategic investment planning is the allocation of portfolio across broad asset classes such as bonds, stocks, cash and real estate considering the legal and policy constraints facing the institution. Empirical evidence by Culp et al. [24] suggests that asset allocation is the most important factor in determining investment performance.
Financial Engineering
Published in A. Ravi Ravindran , Paul M. Griffin , Vittaldas V. Prabhu , Service Systems Engineering and Management, 2018
A. Ravi Ravindran , Paul M. Griffin , Vittaldas V. Prabhu
A prudent investor should invest in all three categories of investment. Immediate needs, including emergency funds, should be kept in cash. The remaining funds should be invested in bonds and stocks to maximize return and minimize risk. Asset allocation refers to the amount of funds invested in cash, bonds, and stocks. Academic research has shown that more than 90% of the performance of an investment portfolio is directly correlated to the asset allocation percentages.
A dynamic target volatility strategy for asset allocation using artificial neural networks
Published in The Engineering Economist, 2018
Traditionally, asset allocation is an investment strategy approach implemented by adjusting the allocation of a given asset in order to maintain equilibrium between risk and reward. The fundamental principle of a target volatility strategy, which works toward efficient asset allocation, is quite simple. It dynamically adjusts the exposure to assets between a risky asset (e.g., stocks) and a risk-free asset (e.g., T-bills) in order to maintain a constant or target level of volatility for a portfolio in all market environments (Chew 2011; Hocquard et al. 2013; Perchet et al. 2016; Xue 2012). The asset allocation between a risky and a risk-free asset is calculated by applying the concepts behind modern portfolio theory. The risk–return profile of a portfolio that consists of these two assets is determined by the proportion of the risky asset (Re) to the risk-free asset (Rf). In other words, if the risky asset is assigned to a proportion of w, then the proportion of the risk-free asset must be 1 − w. Thus, the portfolio expected return (E(Rp)) and risk (σp) are given as follows: