Growth Optimal Portfolio Insurance for Long-Term Investors

Daniel Mantilla-García: We solve for the growth-rate optimal multiplier of a portfolio insurance strategy in the general case with a locally risky reserve asset and stochastic state variables.

Author(s):

Daniel Mantilla-Garcia

Research Associate, EDHEC-Risk InstituteHead of Research & Development, Koris International

The level of the optimal time-varying multiplier turns out to be lower than the standard constant multiplier of CPPI for common parameter values. As a consequence the outperformance of the growth-optimal portfolio insurance strategy (GOPI) does not come with higher risk. In presence of meanreverting stock returns the average allocation to stocks increases with horizon and the optimal multiplier introduces a counter-cyclical ‘tactical’ component to the strategy. Furthermore, we unveil a positive relationship between the value of the strategy and the correlation between the underlying assets.

Type: Working paper
Date: le 07/04/2014
Research Cluster : Finance

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