On the Relevance of Strategic and Tactical Asset Allocation for Portfolio Insurance

Abstract

Portfolio insurance can be an appropriate means to preserve a given capital floor, yet the associated risk budgeting parameters need to be tailored to align with the underlying investment strategy. The main determinants are strategic asset allocation as well as the range and accuracy of tactical asset allocation decisions that would help mitigate downside risk. We evaluate the performance of a multi-asset allocation strategy across a vast number of alternative scenarios using block-bootstrap simulations. Based on a simulated tactical asset allocation model, our framework enables us to gauge the impact of assumed forecast accuracy and the tactical asset allocation range on the ultimate portfolio return distribution under a classic dynamic portfolio insurance risk budgeting framework.

Keywords: Portfolio insurance, Tactical asset allocation

JEL Classification: C58, G11