Department of Finance
Date of this Version
2002
Document Type
Article
Citation
Journal of Actuarial Practice 10 (2002), pp. 97-130
Abstract
Utility-maximization models for optimizing portfolio choices can be subdivided into two classes: those based on maximizing the expected utility of lifetime consumption and those based on maximizing the expected utility of retirement wealth. It is argued that the first type of model, which optimizes both saving and investment decisions, is difficult to apply in practice because of inadequate (or unreliable) information about individual preferences. Although the second type of model only optimizes investment decisions, it is of greater practical value because fewer data on individual preferences are required. The second type of model is used to derive formulae for the optimal portfolio choice at any duration from retirement, assuming that risky investment returns follow a geometric Brownian motion and that the utility function is of the hyperbolic absolute risk aversion (HARA) class. It is shown that individuals who expect to make further contributions to their fund should switch into less risky portfolios on nearing retirement.
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 2002 Absalom Press