Constant Proportion Performance Participation

Abstract

In this paper, we introduce and analyze the constant proportion performance participation (CPPP) strategy as a generalization of the constant proportion portfolio insurance (CPPI) strategy. In the CPPP strategy, the reserve asset is risky and not risk-free. This allows the proposed strategy to alleviate the issues with standard portfolio insurance strategies during periods of low or even negative interest rates. The risky benchmark introduces systematic risk in the analysis. We compare the stochastic dominance of the CPPP and the CPPI strategies and show how CPPP strategies can be constructed to stochastically dominate CPPI.

Keywords: Investment strategies, Performance participation, CPPP, Portfolio insurance, CPPI, Stochastic dominance, Design of dominating strategies