Academic journal article International Journal of Business and Society

Optimal Assets Allocation for Risk Averse Investor under Market Risks and Credit Risk

Academic journal article International Journal of Business and Society

Optimal Assets Allocation for Risk Averse Investor under Market Risks and Credit Risk

Article excerpt

(ProQuest: ... denotes formulae omitted.)


This paper will discuss the problem of an investor who wants to allocate her assets into an optimal portfolio to get an optimal return for her benefit. Beside for having some return, an investor also has to face some risks. The risks that the investor will get, are coming from the market and those are rate of return and rate of inflation. After Asian Crisis in 1997-1998, the central bank of Indonesia has changed its monetary policy framework from having a multiple ultimate targets as for inflation, economy growth and job creation, into a single ultimate target which is inflation rate. It means that the central Bank of Indonesia has mentioned explicitly that they will always interfere the inflation as the last ultimate target for Indonesian Monetary Policy. To reach this target, central bank will set a short term operational targets that will be adapted to the performance of economy and financial markets (Sitorus, 2015). This will follow that the policy of inflation regulation will affect the value of assets.

In emerging market it is known that since global crisis in 2008, the growth of investment in developing countries has been increased more than developed countries. According to ( the emerging economies have been increased two or three times more than developed countries which makes developed countries such as USA have more interested to invest in developing countries as well.

As a consequence for a growing investment, the investment risks will also increase. In the world of investment, the market risks are not the only risks that the investor will face, there is also the possibility that the obligor will face bankruptcy (default). Default risk becomes more important point of view for corporate bond, especially after global crisis in 2008 which has made United States and the world collapsed. Since then there are many literatures studies that brought more deeply about the default risk issue into their studies. Default risk is usually connected with the credit risk, and it is very fundamental, Hou & Jin (2002). In Indonesia the investment in corporate bond has not yet been widely attractive as in other countries. But according to the report of Asian Development Bank (ADB) in June 2013, the investment in corporate bond has increased and reached for U.S$ 20 billion at the end of March 2013. The growth from 2012 is more than 26% (, retrieved February 5th, 2014). This makes the issuance of corporate bond will be more interesting compared to loan from the bank as a source of funding. These reasons will bring increasingly good perspective for the corporate bond growth in Indonesia. Therefore the study of modelling the optimal portfolio under market and default risk is interesting to do, especially in Indonesia.

Furthermore there is a big gap in application of portfolio choice between the practical (industry) point of view and the academic point of view. In practical approach, the static framework is often used. Static here means that that the portfolio was replicated for a given static assets, it does not capture the problem of the investor, while in the practice the conditions as well as personal preferences will change constantly. Different with dynamic portfolio, which means that the portfolio is replicated for a given assets and for a small change of underlying parameters, e.g. time, the price of assets will vary and adjust continually with the portfolio itself.


The study in dynamic portfolio itself has been widely done by other researchers, but it is rarely connecting the rate of return, rate of inflation and credit spread all together into the asset pricing, where those are usually connected into bond pricing. Within the dynamic portfolio model, we have to define first the fundamental model of portfolio. The choices are between continuous-time model and discrete-time model. …

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