Scenario Optimization Asset and Liability Modelling for Individual Investors

Andrea Consiglio, Flavio Cocco, Stavros A. Zenios

Research output: Contribution to journalArticlepeer-review

11 Citations (Scopus)


We develop a scenario optimization model for asset and liability management ofindividual investors. The individual has a given level of initial wealth and a target goal to bereached within some time horizon. The individual must determine an asset allocation strategyso that the portfolio growth rate will be sufficient to reach the target. A scenario optimizationmodel is formulated which maximizes the upside potential of the portfolio, with limits onthe downside risk. Both upside and downside are measured vis- `a-vis the goal. The stochasticbehavior of asset returns is captured through bootstrap simulation, and the simulation isembedded in the model to determine the optimal portfolio. Post-optimality analysis usingout-of-sample scenarios measures the probability of success of a given portfolio. It alsoallows us to estimate the required increase in the initial endowment so that the probability ofsuccess is improved.
Original languageEnglish
Pages (from-to)167-191
Number of pages25
JournalAnnals of Operations Research
Publication statusPublished - 2007

All Science Journal Classification (ASJC) codes

  • Decision Sciences(all)
  • Management Science and Operations Research

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