Portfolio Modelling Using the Goals-Based Investment Approach

ABSTRACT Student's Name Alexandra Smertina Master Thesis Title Portfolio Modelling Using the Goals-Based Investment Approach Faculty Banking Institute Field of study 38.04.08 Finance and Credit Year of thesis completion 2020 Academic Supervisor Oleg Schenker Description of the goal, objectives and main results The goal of the following master thesis is to determine whether in case of clear goal of an investor formulating the goal-based investing modelling approach suits the process of portfolio choosing better than the traditional portfolio theory approach. The process of the mentioned-above goal of the research achievement assumes the necessity of stating the following objectives reflecting the logic and concept of the research: • To formulate the risk metrics in line with the goal-based investing approach as the risk of the goal setback and the maximum drawdown rate of a portfolio; • To assess the risk of the goal setback and the maximum drawdown rate based on the historical data estimation using Monte-Carlo simulation; • To build a model for portfolio construction using the stated-above risk metrics; • To formulate the optimization problem for portfolio modelling in line with the goal-based investing approach; • To choose an optimal portfolio using the quadratic optimization method basing on the historical data estimation; • To compare two portfolios modelled using the goal-based investing approach and the traditional one; • To conclude the better suit of the two mentioned-above methods. The hypothesis of the this research was formulated such as in case of clear goal of an investor formulating the goal-based investing modelling approach suits the process of portfolio selection better than the traditional portfolio theory approach Such proposition was proved on the example of risky assets combination. Throughout of the research the following objectives reflecting the logic and concept of the storyline were solved: • The risk metrics that are in line with the goal-based investing approach were formulated as the risk of the goal setback and the maximum drawdown rate of a portfolio; • The risk of the goal setback and the maximum drawdown rate were assessed based on the historical data estimation using Monte-Carlo simulation; • A model for portfolio construction using the stated-above risk metrics was built; • The optimization problem for portfolio selection that is in line with the goal-based investing approach was formulated; • An optimal portfolio was chosen using the quadratic optimization method basing on the historical data estimation; • Two portfolios using the goal-based investing and the traditional approach were selected, compared and analysed by the set of parameters; • It was concluded that in case of an investor formulating a clear goal the goal-based investing approach gives the higher probability of the investor’s goal achievement than the portfolio chosen using the traditional portfolio theory. Keywords Goal-based investing, portfolio modelling, traditional portfolio theory, assumptions of the traditional portfolio theory.