METHOD OF DETERMINING OPTIMAL ASSET ALLOCATION UTILIZING ASSECT CASH FLOW SIMULATION

The invention provides a method of simulating future cash flow for a given asset allocation under a variety of economic conditions, comparing the results of the simulation to a predefined risk tolerance baseline, and preferably adjusting the asset allocation until the results of the simulation reflect a maximum rate of return for a given risk tolerance. The simulation of cash flow generates a plurality of asset cash flow projections for a given asset allocation that are preferably graphically represented with respect to the predefined risk tolerance baseline. The risk tolerance baseline is plan specific and is preferably set to a multiple of a preferred risk factor such as percentage of payroll cost or benefit cost. The occurrence of an asset cash flow projection falling below the risk tolerance baseline defines a risk tolerance failure event. The number of risk tolerance failure events occurring for the asset cash flow projections associated with a given asset allocation is indicative of whether that asset allocation produces an acceptable risk tolerance level. The asset allocation is adjusted and the process is repeated until the highest average value of all asset cash flow projections is achieved within an acceptable number of risk tolerance failure events.