Multicriteria asset allocation in practice

03/19/2021
by   Kerstin Dächert, et al.
0

In this paper we consider the strategic asset allocation of an insurance company. This task can be seen as a special case of portfolio optimization. In the 1950s, Markowitz proposed to formulate portfolio optimization as a bicriteria optimization problem considering risk and return as objectives. However, recent developments in the field of insurance require four and more objectives to be considered, among them the so-called solvency ratio that stems from the Solvency II directive of the European Union issued in 2009. Moreover, the distance to the current portfolio plays an important role. While literature on portfolio optimization with three objectives is already scarce, applications with four and more objectives have not yet been solved so far by multi-objective approaches based on scalarizations. However, recent algorithmic improvements in the field of exact multi-objective methods allow the incorporation of many objectives and the generation of well-spread representations within few iterations. We describe the implementation of such an algorithm for a strategic asset allocation with four objective functions and demonstrate its usefulness for the practitioner. Our approach is in operative use in a German insurance company. Our partners report a significant improvement in their decision making process since, due to the proper integration of the new objectives, the software proposes portfolios of much better quality than before within short running time.

READ FULL TEXT

page 14

page 21

research
07/13/2021

On the impact of Performance Antipatterns in multi-objective software model refactoring optimization

Software quality estimation is a challenging and time-consuming activity...
research
07/08/2021

Many Objective Bayesian Optimization

Some real problems require the evaluation of expensive and noisy objecti...
research
10/23/2022

Multi-Objective GFlowNets

In many applications of machine learning, like drug discovery and materi...
research
10/11/2022

Enhancing Branch-and-Bound for Multi-Objective 0-1 Programming

In the bi-objective branch-and-bound literature, a key ingredient is obj...
research
07/10/2023

Formulating A Strategic Plan Based On Statistical Analyses And Applications For Financial Companies Through A Real-World Use Case

Business statistics play a crucial role in implementing a data-driven st...
research
06/06/2021

What if we Increase the Number of Objectives? Theoretical and Empirical Implications for Many-objective Optimization

The difficulty of solving a multi-objective optimization problem is impa...
research
11/10/2021

Local Justice and the Algorithmic Allocation of Societal Resources

AI is increasingly used to aid decision-making about the allocation of s...

Please sign up or login with your details

Forgot password? Click here to reset