Decision Making Under the Risk Using Assets Liability Model (ALM): Case Study on Four Assets with no Transaction Costs

Abstract

This paper focuses on the Asset Liability Model (ALM) with multistage stochastic model. The model is based on four assets with no transaction costs. The initial wealth is Wo should be invested wisely to meet the liability L at the end of the planned horizon H. the best possible decision is to keep the final wealth larger than liability L. Using excel solver we try to optimize solution as best possible decision that will at least meeting the liability L at the end of the terminal wealth.

The optimization case was adopted from the book (Brandimarte, 2011, pp.754-758) which has been modified with four assets and with no transaction costs. In adapting the case, we added additional returns for extra 2 stocks, while returns for the initial stock and bond remain.