New Efficient Frontier: Can Structured Products Really Improve Risk-Return Profile?

41 Pages Posted: 5 Apr 2011

See all articles by Gianluca Fusai

Gianluca Fusai

Università del Piemonte Orientale Dipartimento di Studi per l'Economia e l'Impresa; Sir John Cass Business School - City, University of London

Giovanna Zanotti

University of Bergamo; SDA Bocconi

Date Written: December 20, 2010

Abstract

In this paper we investigate the contribution of structured bonds to the efficient frontier. We conduct our analysis by simulating the term structure according to a no-arbitrage multifactor model (G2 ) and comparing the performance of basic products (like zero-coupon bond, coupon bond and floating rate notes) with respect to more sophisticated products (like cms, collars, spread and volatility notes). In particular, our analysis considers different initial market environment like interest rate term structure shapes, as well as volatility and correlation in its changes and takes into account how the combined effect of risk-premium required by investors and fees that they have to pay can change the portfolio allocation respect to the one made only of basic securities. Our simulation results show that structured products can be an interesting investment only under particular scenarios. However, in general the return net of the fees in these securities is in average lower than the return in basic securities.

Suggested Citation

Fusai, Gianluca and Zanotti, Giovanna, New Efficient Frontier: Can Structured Products Really Improve Risk-Return Profile? (December 20, 2010). CAREFIN Research Paper No. 28/2010. Available at SSRN: https://ssrn.com/abstract=1802582

Gianluca Fusai (Contact Author)

Università del Piemonte Orientale Dipartimento di Studi per l'Economia e l'Impresa ( email )

Via Perrone, 18
Novara, 28100
Italy

HOME PAGE: http://https://upobook.uniupo.it/gianluca.fusai

Sir John Cass Business School - City, University of London ( email )

106 Bunhill Row
London, EC2Y 8HB
Great Britain

HOME PAGE: http:// www.cass.city.ac.uk/experts/G.Fusai

Giovanna Zanotti

University of Bergamo ( email )

Via Salvecchio, 19
Bergamo, 24129
Italy

SDA Bocconi ( email )

via Bocconi 8
Milano, MI 20135
Italy
+390258366101 (Phone)

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