Abstract
This paper examines a mean-variance portfolio selection problem with stochastic salary and inflation protection strategy in the accumulation phase of a defined contribution (DC) pension plan. The utility function is assumed to be quadratic. It was assumed that the flow of contributions made by the PPM are invested into a market that is characterized by a cash account, an inflation-linked bond and a stock. In this paper, inflationlinked bond is traded and used to hedge inflation risks associated with the investment. The aim of this paper is to maximize the expected final wealth and minimize its variance. Efficient frontier for the three classes of assets (under quadratic utility function) that will enable pension plan members (PPMs) to decide their own wealth and risk in their investment profile at retirement was obtained.
Highlights
In this paper, we consider a mean-variance portfolio optimization method with stochastic salary for a defined contribution (DC) pension plan
We study a meanvariance approach (MVA) to portfolio selection problem with stochastic salary of a pension plan members (PPMs) and inflation protection strategy in accumulation phase of a DC pension scheme
Let c ∈ R+ be the proportion of the PPM salary that is contributed into the pension plan, the amount of contributions made by the PPM is cY (t) at time t
Summary
We consider a mean-variance portfolio optimization method with stochastic salary for a DC pension plan. This method is based on the pioneering. They show the possibility of transforming the difficult problem of mean-variance optimization problem into a tractable one, by embedding the original problem into a stochastic linear-quadratic control problem, that can be solved using standard methods These approaches have been extended and used by many in the financial literature, see for instance, [23], [3], [15], [14] and [7]. We study a meanvariance approach (MVA) to portfolio selection problem with stochastic salary of a PPM and inflation protection strategy in accumulation phase of a DC pension scheme.
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