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Stochastic Dynamic Programming in a Computer Using a Multi-Part Utility Function and Local Search to Efficiently Compute Asset Allocation and Consumption

  • US 20160086277A1
  • Filed: 09/22/2014
  • Published: 03/24/2016
  • Est. Priority Date: 09/22/2014
  • Status: Abandoned Application
First Claim
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1. A method in a computer including processor(s) coupled to a memory, comprising:

  • inputting data representing consumption level(s) into the memory, wherein a value of the consumption level(s) represents required consumption C1;

    inputting data representing returns of each asset class into the memory;

    performing one or more step(s) of stochastic dynamic programming (SDP) in the processor(s) using the data representing the returns of each asset class and values of a utility function U based on the consumption levels to compute values of aggregate utility of wealth, wherein the SDP step(s) includes the following sub-steps;

    reading data representing an aggregate utility of wealth Ut+1 for wealth levels Wt+1,1 through Wt+1,M, and a description of single time period utility U;

    computing local searches in the processor(s) an optimal asset allocation vector At, an optimal consumption Ct, and an optimal aggregate utility of wealth Ut for a wealth level Wt,1;

    computing local searches in the processor(s) the optimal asset allocation vector At, the optimal consumption Ct, and the optimal aggregate utility of wealth Ut for a wealth level Wt,2;

    computing local searches in the processor(s) the optimal asset allocation vector At, the optimal consumption Ct, and the optimal aggregate utility of wealth Ut for additional wealth levels up to at least wealth level Wt,M;

    storing the values of the aggregate utility of wealth Ut for wealth levels Wt,1 through Wt,M in the memory; and

    outputting the optimal asset allocation vector AB and the optimal consumption CB at an initial age B and wealth WB.

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