Abstract
Specific purpose guarantee funds such as pension guarantee funds are popular among loss-averse investors with common investment purposes, but their investment strategies, hedging techniques, and performance receive little academic attention. We propose a practical purpose-oriented constant proportion portfolio insurance (PO-CPPI) strategy that optimally allocates its assets into a risk-free fund and a purpose-related portfolio to maximize investors' utility with respect to their investment purpose and control the downside risk of the portfolio. The closed-form solutions of PO-CPPI derived in the continuous time case, followed by Monte-Carlo simulations in the discrete time case, also support the superiority of the proposed strategy.
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