Portfolio Selection Strategies with Return Clause in a DC Pension Fund

Abstract

This paper solves the problem faced by a pension fund manager in determining the optimal selection strategies involving four different assets comprising of one risk free asset and three risky assets whose prices are modelled by geometric Brownian motion. Also, a clause mandating the fund managers to return the accumulations with predetermined interest to members who lost their life during the accumulation period is considered. A stochastic optimal control model is formulated comprising of member’s monthly contributions, invested funds and the returned contributions. Also, an optimization problem from the extended Hamilton Jacobi Bellman (HJB) equation is established using the game theoretic approach. The explicit solutions of the optimal selection strategies and the efficient frontier are obtained by solving the extended HJB equation using the mean variance utility and separation of variable technique. Furthermore, a sensitivity analysis of the effect of some parameters on the optimal selection strategies is carried out numerically.

Investment asset allocation in response to tax relief for mutual funds: The case of South Korea

“…The differential tax treatment on income from fund investments is not common in other countries (Akpanibah & Ini, 2019). However, South Korea has introduced a lot of temporary tax reliefs on existing fund investment tax laws by using the RSTA for the various policy goals.…”

On Application of Matlab on Efficient Portfolio Management for a Pension Plan in the Presence of Uneven Distributions of Accumulated Wealth

“…[9], studied optimal investment plan for a pension plan when the returned contributions are with predetermined interest; they considered investment in a risk free and a risky asset and assume the risky asset is modelled by Heston volatility model. [10], investigated investment plan with return of premium clauses under inflation risk and volatility risk; they considered investment in a risk free asset, the inflation index bond and the stock whose price was modelled by Heston volatility [11], studied optimal portfolio strategies with four assets modelled by geometric Brownian motion when the return premium is with interest and the remaining accumulated wealth are equally distributed among the surviving members. From the available literatures and to the best of our knowledge there is no work on the optimal investment plan with return clause that considers investment in four assets such that the return contributions are with predetermined interest and the remaining accumulations are not evenly distributed among the surviving members.…”