Department of Finance
Date of this Version
1996
Document Type
Article
Citation
Journal of Actuarial Practice 4 (1996), pp. 47-65
Abstract
We present some rudimentary concepts on asset/liability management and describe an approach to asset allocation modeling for institutions that invest to meet liabilities. The traditional risk/reward framework of financial economics is used as a starting pOint. The definitions of risk and reward are then refined with regard to the institution under consideration. A simple model of a U.S. life office is examined. We assume that the only investments available are domestic stocks and long-dated government bonds. Stochastic simulation is used to create a large number of future investment scenarios using historical total return data for these asset classes. The ability of the institution to meet its liabilities under each simulated scenario is examined. We construct optimal risk/reward profiles, and hence the optimal asset allocation strategy, and show that they can vary considerably by liability profile.
Included in
Accounting Commons, Business Administration, Management, and Operations Commons, Corporate Finance Commons, Finance and Financial Management Commons, Insurance Commons, Management Sciences and Quantitative Methods Commons
Comments
Copyright 1996 Absalom Press