Decision-making Approach to Loan Portfolio Based on Monte Carlo Simulation

The return of project is usually directly proportional to risk.The banks hope to maximize the portfolio return and minimize the portfolio risk,but the commercial loan can′t optimize the return and risk together.Return and risk is measured by IRR and VAR based on Monte Carlo simulation;a multi-objective decision-making model for optimization of loan portfolio was established.Solving the model step by step,some efficient portfolio was gained and the efficient frontier curve was simulated.Optimal loan′s portfolio satisfying the bank′s risk preference can be solved from the intersectional graphic position of indifference curve and efficient frontier curve.The approach directly uses portfolio return and risk to optimize the loan portfolio,so that the precision of risk decision-making can be improved.Banks can adjust the weights of projects at will to improve the return,diminish the risk and gain the optimal loan portfolio.