Growth Optimal Portfolio Insurance for Long-Term Investors

Journal Of Investment Management, Forthcoming

37 Pages Posted: 26 Feb 2014 Last revised: 26 May 2014

See all articles by Daniel Mantilla-Garcia

Daniel Mantilla-Garcia

Universidad de Los Andes - School of Management; EDHEC Risk Institute

Date Written: February 25, 2014

Abstract

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. 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 mean-reverting 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.

Keywords: Portfolio Insurance, Asset Allocation, Risk Management

JEL Classification: G11, G110

Suggested Citation

Mantilla-Garcia, Daniel, Growth Optimal Portfolio Insurance for Long-Term Investors (February 25, 2014). Journal Of Investment Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2400993

Daniel Mantilla-Garcia (Contact Author)

Universidad de Los Andes - School of Management ( email )

Bogota, Bogota D.C.
Colombia

EDHEC Risk Institute ( email )

Lille
France

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