A Wealth Allocation Framework for Individual Investors with Multiple Objectives

By expanding Markowitz's mean-variance framework to include management of personal risk and allow personal aspirations, this paper constructs a wealth allocation framework for downside wealth protection and upside potential for high affluence. From the perspective of individual investors, we identify three major risk dimensions and construct risk measures for each risk dimension. Available investment assets are classified for the three risk dimensions, protective, market and aspirational, based on their risk-return profiles. All risk dimensions are optimized simultaneously through appropriate allocation of total wealth in the investment assets. We mathematically formulate the wealth allocation problem as a nonlinear optimization problem and implement the framework in different market scenarios to test it, along with utilizing market data to check its performance in real world.