Goal-Based Investing with Stochastic Dominance in Defined Contribution Plans

Yongtae Kim; Sung Jooho; Doyoung Cheong

doi:10.23842/jif.2017.28.4.003

Journal of Insurance and Finance

2017, 28(4), pp.99-126
DOI :10.23842/jif.2017.28.4.003
Publisher : Korea Insurance Research Institute
Research Area : Business Management

Yongtae Kim ¹ , Sung Jooho ² , Doyoung Cheong ³

¹ 경희대학교
² 경희대학교
³ KDB 금융대학

ABSTRACT

There exist lots of difficulties for individual investors to apply the mean-variance framework to their investment decision making, although the framework has been the mainstream of modern investment theory. According to the recent research papers, many of DC participants’ portfolios are carelessly focused on risk-free assets with low expected returns. In this paper, we introduce Goal-Based Investing using stochastic dominance for DC participants. GBI is an investment theory that integrates the advantages of traditional Markowitz theory and Behavioral Portfolio Theory. Hereby, the investment risk is measured as not the standard deviation of return but the probability of failing to reach goals. Also, GBI investors can divide their aggregated assets into the subportfolios which have different investment goals. Through this solution, investors will be able to make the more accurate estimation of their risk attitudes and invest their pension assets to the appropriate financial products. We hope that this paper could contribute to asset allocation strategies for DC participants to achieve investment goals.
KEYWORDS

goal-based investing , stochastic dominance , mental accounting , DC pension plan , investment risk , subportfolios
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