The optimal asset and liability portfolio for a financial institution with multiple lines of businesses

In this paper we present an optimization framework to deal with the asset-liability portfolio selection problem. We consider a financial institution that has multiple lines of business. The capital allocation is obtained by minimizing the sum of the expected squared differences between the liability in each line of business and the value of the corresponding investment portfolio. We show that in certain circumstances the bottom-up approach is consistent with the top–down approach, where the optimal capital is determined for the whole portfolio rather than its individual components. Such a case happens for example if the same weight function is used for all lines of business in the two approaches. Finally, we obtain investment portfolios under some limitations on short sales. © 2013, DAV / DGVFM.