Precision Investing: On the Optimal Design of Personalized Performance Portfolios for Liability-Driven Investors

The Journal of Portfolio Management Volume 50, Issue 3 Quantitative Special Issue 2024

This article provides an explicit characterization for the optimal performance portfolio when this portfolio is used as part of a multiasset liability-driven investment strategy that may involve rebalancing. In this context, the optimal demand for risky assets can be represented as a combination of several funds, including the maximum Sharpe ratio portfolio, the minimum variance portfolio, and the portfolio that is most correlated with liabilities. The allocation to the various funds depends on the investor’s liability-driven objectives and constraints. This personalized approach to the construction of performance portfolios is somewhat similar to the precision medicine model, widely regarded as a fundamental breakthrough that marks the start of a whole new era for medical practice by proposing the customization of health care instead of a one-drug-fits-all approach.