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Safety First Portfolio Insurance

11 Pages Posted: 4 Mar 2008  

William N. Goetzmann

Yale School of Management - International Center for Finance; National Bureau of Economic Research (NBER)

Mark Broadie

Columbia University - Columbia Business School - Decision Risk and Operations

Date Written: February 21, 1992

Abstract

In this study, we show how a dynamic insurance program can be implemented within a mean-variance framework. The approach combines elements of the single period safety first idea suggested by Telser and developed by Leibowitz with multiperiod insurance strategies like CPPI and TIPP. The insurance program allows the user to set a probability of hitting a specified floor or target and also allows for changing risk attitudes through time. When the insurance strategy is tested on historical data, the insured portfolio achieves high long-term returns while mostly avoiding long bear markets. In order to understand how the insurance strategy might perform in the future, we simulate returns of the stock market and compare the insurance strategy to buy and hold strategies. An additional benefit of the safety first approach is that it specifies a strategy for underfunded portfolios as well as overfunded portfolios.

Keywords: insurance, Telser, risk, insurance portfolio

Suggested Citation

Goetzmann, William N. and Broadie, Mark, Safety First Portfolio Insurance (February 21, 1992). Available at SSRN: https://ssrn.com/abstract=1102328 or http://dx.doi.org/10.2139/ssrn.1102328

William N. Goetzmann (Contact Author)

Yale School of Management - International Center for Finance ( email )

165 Whitney Ave.
P.O. Box 208200
New Haven, CT 06520-8200
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203-432-5950 (Phone)
203-436-9252 (Fax)

HOME PAGE: http://viking.som.yale.edu

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mark Broadie

Columbia University - Columbia Business School - Decision Risk and Operations ( email )

New York, NY
United States
212-854-4103 (Phone)

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