An Asset-Liability Investment System

The Pacific Financial Asset Management Company uses stochastic optimization to allocate financial assets. The critical issue is to balance the risk and rewards of the strategic investment decisions in concert with the movements of the projected liabilities. Motivating this approach is the trend to managing risk in a more realistic and comprehensive fashion. The resulting nonlinear optimization system extends the asset-only model of Markowitz to handle liabilities. The aim of the integrative asset-liability system is the preservation of the firm's wealth as measured by assets minus the present value of their liabilities. While the integrative system requires greater information, its recommendations are more closely tailored to the investor's circumstances. The system has been implemented on an IBM PC so that the interactive features can be readily brought into the field.