After Tax Payoff of CPPI

Abstract

Structured products such as constant proportion portfolio insurance (CPPI) have been a popular product for retail investors. This research investigates the after tax return of CPPI using internal rate of return (IRR) and assuming an average cost accounting system. Using this statistic, we apply a Gaussian CRRA power utility to determine the initial wealth an investor with a given level of risk aversion should allocate towards a CPPI product. The amount to allocate is found to be lower than would be implied when ignoring the time value of money and the product is not always capital preserving due to frictional forces. This amount may be lower for some investors than the requirement of many o -the-shelf CPPI products solicited to retail investors. These results may be of interest to governing bodies modernising security legislation, institutions considering to issue CPPI products, quantitative fi nance researchers and retail investors considering an investment in CPPI.