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Goal-based investing based on multi-stage robust portfolio optimization

Author

Listed:
  • Jang Ho Kim

    (Kyung Hee University)

  • Yongjae Lee

    (Ulsan National Institute of Science and Technology (UNIST))

  • Woo Chang Kim

    (Korea Advanced Institute of Science and Technology (KAIST))

  • Frank J. Fabozzi

    (EDHEC Business School)

Abstract

While portfolio optimization is generally based on the return and risk of a portfolio, goal-based investing primarily focuses on achieving financial goals of individuals, which has become a popular approach in personalized financial planning. While many long-term financial planning models use scenarios for representing uncertainty in future market dynamics, it is subject to the curse of dimensionality. In this study, we propose a goal-based investing model for personalized lifetime financial planning based on robust portfolio optimization, which incorporates multiple goals that occur in different periods with various priorities. Empirical results illustrate how the size of uncertainty sets and risk constraints can be customized for finding the optimal investment and show efficiency in solving a portfolio problem with many stages compared to scenario-based approaches.

Suggested Citation

  • Jang Ho Kim & Yongjae Lee & Woo Chang Kim & Frank J. Fabozzi, 2022. "Goal-based investing based on multi-stage robust portfolio optimization," Annals of Operations Research, Springer, vol. 313(2), pages 1141-1158, June.
    • Handle: RePEc:spr:annopr:v:313:y:2022:i:2:d:10.1007_s10479-021-04473-7
    DOI: 10.1007/s10479-021-04473-7
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