After computing the surplus efficient frontier, what is the next step in the surplus optimization process?

The next step in the surplus optimization process after computing the surplus efficient frontier is to compare it with the asset-only efficient frontier. This comparison is critical as it allows the investor to evaluate how the surplus portfolio performs relative to a portfolio constructed solely from the assets.

This analysis provides insights into how much additional return can be achieved for a given level of risk when incorporating liability considerations into the portfolio. By examining the differences between the two frontiers, investors can identify whether the surplus optimization has led to a more efficient allocation of resources that better meets their specific return requirements relative to the risks associated with both the assets and liabilities.

This step ensures that the chosen strategy aligns well with the investor's risk tolerance and return objectives, taking both the surplus position and the performance of assets into account. Understanding this relationship is essential for developing a robust investment strategy that can effectively support the objectives of the investment portfolio while managing associated risks efficiently.