A Rough Set Theory Approach for Minimizing Insolvency Risk of Pension Fund

Abstract

The main objective of funded pension arrangements is to provide adequate incomes for retirement. Pension contributions and investment return on accumulated funds during an individual’s working life and retirement years are the key factors that affect retirement incomes, where the main objective of funded pension arrangements is to yield adequate incomes for pension plan. Long-term pension investment returns are driven by portfolio selection of pension plans. Asset allocation management decisions involve planning asset classes for investment and their weights to meet the return objective of fund participants and control the total risk level of the fund. Financial markets have many characteristics as changes, fluctuations and ambiguity.  So many authors proposed uncertain portfolio selection models because the existence of several non-stochastic factors in stock market where the deterministic portfolio selection is not a sensible option for the plan sponsor. Rough set theory provides a powerful tool for describing the ambiguity and vagueness. In this paper, a portfolio selection optimization model is introduced based on variance minimization at a required return level that save the fund against insolvency risk. The proposed method uses a rough set theory approach for optimizing the mean-variance model defined by Markowitz.