Application of Dynamic Programming for the Provident Fund Investment Allocation of Ghana Community Network Services Limited Staff (GCNET) Association
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Date
2013
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Abstract
Fund managers have to decide the amount of a fund's assets and the type of investment
Options that should be undertaken, considering the interest rate and the tradeoff between being able to meet shareholder redemptions and minimizing the opportunity cost from lost investment opportunities. In addition, they have to consider redemptions by individuals as well as institutional investors, the current performance of the stock market and interest rates, and the pattern of investments and redemptions which are correlated with market performance. We formulated the provident fund investment problem of Ghana Community Network Services Limited, GCNet, a Ghanaian company as a dynamic program model. The objective is to determine the optimal investment policy in the company so that the business gets the optimum return of profit from the number of investment alternatives. The general practice is that most establishments do not have a well structured plan on how to allocate funds to various investment options in order to maximize returns from the investments. Investment funds are allocated by trial and error basis and at the discretion of people or departments in charge. These methods are faulted, and are basically inefficient as returns from the fund invested are not optimal. To overcome this problem, we proposed a dynamic programming algorithm in solving our problem. We use actual data from the funds coffers for market performance and interest rates, and demonstrate the quality of the solution as compared to the existing solution from the firm’s investment strategy. We showed from our results that our solution to our investment problem gave an optimal investment returns of GH¢6,600.00, as against the firm’s record of investing all the GH¢100 at a return of GH¢6,500.00. The result is a simple policy that describes when money should be moved into and out of cash based on market performance.
Description
A Thesis Submitted to the Institute of Distance Learning, Kwame Nkrumah University of Science and Technology in partial Fulfillment of the Requirements for the Degree of MSc. Industrial Mathematics.