Portfolio Insurance: A Short Introduction

Abstract

The objective of this paper is to provide a short introduction about Portfolio Insurance. A general framework is proposed that encompasses the common investment strategies: constant-mix, buy-and-hold and constant proportion portfolio insurance (CPPI). Option based portfolio insurance (OBPI) strategies are also discussed. To get the value of an investment guaranteed is quite appealing. This type of strategy originated in the 70's following Leland's idea and started to develop in the financial industry in the 80's. Three questions arise: what is portfolio insurance, why does it exist and what is the cost of this strategy. This paper defines the portfolio insurance strategy, provides examples and introduces some history about this strategy. Then, we ask why do people buy portfolio insurance. The paper provides some answers by studying the possible utility functions corresponding to these strategies. The impact of the path dependency of the strategy is also presented. The cost of portfolio insurance is also studied. Finally, we provide some insights about specific issues.