What is the first step in the surplus optimization approach?

In the surplus optimization approach, the first step involves selecting appropriate asset categories and determining the planning horizon. This foundational step is critical because it sets the framework for constructing the investment portfolio aimed at optimizing surplus.

Selecting asset categories means identifying the types of investments that will be included in the portfolio, which can range from stocks and bonds to alternative investments. The planning horizon is essential as it indicates the time frame over which the investment strategy will be evaluated and implemented. The combination of these two aspects establishes the scope of the investment strategy and informs subsequent decisions regarding risk tolerance, expected returns, and asset allocation.

By beginning with asset categories and the planning horizon, the investor is able to tailor their investment approach to align with their specific financial goals and constraints, ensuring that the portfolio is designed with the right blend of growth potential and risk management in mind. This preliminary step is vital for effectively moving on to other key analysis activities, such as estimating expected returns, reviewing financial constraints, or analyzing historical performance, which all follow in the process of surplus optimization.