M. Zaki Khorasanee
Abstract
This paper examines the problem of investment risk in money purchase pension plans. The disadvantages of modeling equity returns as independent, identically distributed random variables are considered, and a modified stochastic model of equity returns is proposed. This modified stochastic model is used to estimate the variability in a plan member’s retirement fund and to compare various alternatives to investing 100 percent of the assets in ordinary shares. Varying conclusions are drawn about the likely success of these alternative investment strategies in reducing investment risk.
Key words and phrases: pension plan, defined contributions, dividend yield, investment risk
M. Zaki Khorasanee