Abstract
A new algorithm for asset allocation is developed. The algorithm provides consistent approximations to the optimal savings allocations which are dependent upon personal characteristics such as age and income. Numerical analysis is used to solve an individual's lifetime consumption-investment problem on an annual basis within a context of complete markets and nonmarketable income. The investment opportunity set approximates that which was available (expost) during the 1926–1981 period. Relative risk aversion in wealth is highest for the elderly, lowest for the middle aged (less than ½ of that of the elderly) with young adults in the midrange despite the imposition of additive isoelastic utility of consumption. Moreover, the sensitivity of optimal portfolio proportions to changes in the opportunity set is greatest for the middle aged.
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