Mean-Variance Portfolio Optimization Problem with Fixed Salary and Inflation Protection for a Defined Contribution Pension Scheme

Charles I. Nkeki and Chukwuma R. Nwozo

Journal of Statistical and Econometric Methods, 2013, vol. 2, issue 2, 10

Abstract: This paper examines a mean-variance portfolio selection problem with fixed salary or income and inflation protection strategy in the accumulation phase of a defined contribution (DC) pension plan. It was assumed that the flow of contributions made by the PPM are invested into a market that is characterized by a cash account, an inflation-linked bond and a stock. Due to the increasing risk of inflation rate and diminishing value of pension benefits, the need for hedging such risk has becomes imperative. In this paper, inflation-linked bond is traded and used to hedge inflation risks associated with the investment. The aim of this paper is to maximize the expected final wealth and minimize its variance. Efficient frontier for the three classes of assets that will enable pension plan members (PPMs) to decide their own wealth and risk in their investment profile at retirement was obtained.

Date: 2013
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