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Variational Form of Classical Portfolio Strategy and Expected Wealth for a Defined Contributory

DOI: 10.4236/jmf.2012.21015, PP. 132-139

Keywords: Variational Form, Classical Portfolio Strategy, Expected Wealth, Defined Contribution, Pension Scheme, Pension Plan Member, Inter-Temporal Hedging Terms, Stochastic Salary

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Abstract:

This paper examines the variational form of classical portfolio strategy and expected terminal wealth for a Pension Plan Member (PPM) in a Defined Contribution (DC) Pension scheme. The flows of contributions made by PPM are invested into a market that is characterized by a cash account and a stock. It was assumed that the growth rate of salary of PPM is a linear function of time. The present value of PPM’s future contribution process was obtained. The optimal portfolio processes with inter-temporal hedging terms that offset any shocks to the stochastic cash inflows were established. The expected value of PPM’s terminal wealth was obtained.

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