Pension Portfolio Optimization and Impact of Debt Defaults
DOI:
https://doi.org/10.54691/bcpbm.v23i.1355Keywords:
Portfolio, Pension, Pension Default, Sharpe Ratio, Fama-French 3-factor model.Abstract
Usually, the government offers two pension methods, a lumpsum buyout or an annual pension. In this paper, we provide an effective method to evaluate these two government pension methods. Initially, we constructed a pension portfolio consisting of five popular assets, such as the tech giants and popular ETFs. Then we use the Fama-French 3-factor model to calculate the expected returns of every asset. The Sharpe Ratio is the standard to make a choice that accepts the portfolio with a pension or the portfolio without a pension. Except for the Sharpe Ratios, we also took the government debt default and retirement ages into consideration. Government debt defaults contain two types, partial defaults, and full defaults. These two different kinds of defaults can have a significant impact on pension choice. With this method, we could obtain the decision boundary of the pension choice. Investors could utilize this boundary to decide whether to accept a pension or a lumpsum buyout by themselves.
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