Modelling of Asset Allocation

Bank asset management mainly involves profit maximization through investment in loans giving high returns on loans, investment in securities for reducing risk and providing liquidity needs. In particular, commercial banks grant loans to creditors who pay high interest rates and are not likely to default on their loans. Furthermore, the banks purchase securities with high returns and low risk. In addition, the banks attempt to lower risk by diversifying their asset portfolio. In this book, we solve an optimal asset allocation problem in banking under the mean-variance frame work. The dynamics of the different assets are modelled as geometric Brownian motions, and our optimization problem is of the meanvariance type.