The main goal of this procedure is formation of investor's portfolio based on his investment preferences. This is achieved by means of calculating and analyzing of a table that contains probabilities of falling short of a selected investment target at some date in the future. Each column of a table corresponds to specific value of the investment horizon Critical date for the investor: when reaching it he/she evaluates success made by the investments. For private persons such date often corresponds to the moment up to which they postpone their consumption. measured in years; each table row corresponds to some target excess growth rate The difference between growth rate which the investor demands on his investments and the Risk-free rate. All rates are continuously compounded..
Based on this table one can propose the following algorithm of portfolio selection:
The investor determines his/her investment horizon.
The investor determines his/her target excess growth rate.
In case the corresponding target shortfall probability is unacceptable for the investor, then the investor lowers his target, repeating the whole procedure from step 2.
After the investor has found the target excess rate value which leads to a satisfactory level of shortfall probability, you can easily calculate his portfolio. To accomplish this, perform target shortfall probability minimization with the same value of target excess rate and the same set of constraints.