Growth Optimal Portfolio Insurance for Long-Term Investors
Journal Of Investment Management, Forthcoming
37 Pages Posted: 26 Feb 2014 Last revised: 26 May 2014
Date Written: February 25, 2014
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: Suggested Citation