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Abstract
The authors propose an incremental step toward combining the insights of modern portfolio theory with some of the propensities documented in the literature on behavioral finance. They develop a goals-based wealth management approach that finds a specific subportfolio to address each of an investor’s goals and then derive the least-cost solution. They relate the closed-form solution for the one-period, two-asset problem to the mean–variance efficient frontier. Consistent with the “lockbox separation”concept proposed by Sharpe, they demonstrate that a multiperiod goal, such as a retirement plan, can be viewed as a collection of single-period problems. Next, they extend their result to a market with many assets, where portfolios are exogenously given. Finally, they illustrate the approach with a case study with multiple asset classes and multiperiod goals.
TOPICS: Portfolio theory, in wealth management
- © 2011 Pageant Media Ltd
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US and Overseas: +1 646-931-9045
UK: 0207 139 1600