Portfolio Insurance: A Short Introduction

22 Pages Posted: 11 Jun 2009 Last revised: 11 Aug 2009

Eric Bouyé

World Bank

Date Written: May 27, 2009

Abstract

The objective of this paper is to provide a short introduction about Portfolio Insurance. A general framework is proposed that encompasses the common investment strategies: constant-mix, buy-and-hold and constant proportion portfolio insurance (CPPI). Option based portfolio insurance (OBPI) strategies are also discussed. To get the value of an investment guaranteed is quite appealing. This type of strategy originated in the 70's following Leland's idea and started to develop in the financial industry in the 80's. Three questions arise: what is portfolio insurance, why does it exist and what is the cost of this strategy. This paper defines the portfolio insurance strategy, provides examples and introduces some history about this strategy. Then, we ask why do people buy portfolio insurance. The paper provides some answers by studying the possible utility functions corresponding to these strategies. The impact of the path dependency of the strategy is also presented. The cost of portfolio insurance is also studied. Finally, we provide some insights about specific issues.

Keywords: Portfolio Insurance, CPPI, OBPI, constant-mix, buy-and-hold, options, path-dependent strategy, history of finance, Brady Report, 1987 crisis

JEL Classification: B20, C60, G10

Suggested Citation

Bouyé, Eric, Portfolio Insurance: A Short Introduction (May 27, 2009). Available at SSRN: https://ssrn.com/abstract=1416790 or http://dx.doi.org/10.2139/ssrn.1416790

Eric Bouyé (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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