Optimizing pension asset & simulated derivative in Nigeria with minimum required return

Abstract

This work focuses on a forecast view point, the expansion gain in view of expanding Nigeria’s financial market through exchange traded options product. It further mixed existing an AES portfolio returns with simulated returns of a theoretical call option created from stock price forecast. A mean comparison between AES portfolio returns and AES plus simulated call option return was tested to see if there exist the usefulness of adding more aggressive variable income security in Pension portfolio as a stimulant to higher return. Furthermore, contributor’s minimum required return was used in our mathematical formulation as a risk minimization measure. A mathematical model-1 and Model-2 involving 5 and 6 variables respectively, 5 inequality constraints covering regulatory limitations and limitation on scarce resource known as Asset Under Management (AUM), suggested and mathematically shown to be possible through “minimization of risk for a set minimum return” while obeying all regulatory controls as our constraints. Optimized portfolio using TORA and MatLab showed a return of 13.06% from AES portfolio without a mix with simulated call option return. A minimum contributor return demand of 15% was used but it failed to achieve this but returned 13.06%. A mix of the AES portfolio with simulated call option return achieved our contributor 15% minimum return demand. Our test of significance at 95% confidence to infer that there is a difference in rate of return between AES fund manager’s and our mathematically optimized returns rejected our null and accepted our alternative hypothesis. We therefore posit that there is a 5% probability that our optimized mixed portfolio may not achieve a higher return than the AES fund manager’s portfolio.