Who Can Portfolio Insurance Strategies Attract? Mapping Solutions to Investors

Abstract

The analysis of investment decisions under uncertainty are based on different theories. From the normative expected utility to behavioural finance one can test different attitudes towards risk. Investors are not all alike, their decisions are focus either on utility derived from a certain amount of estimated wealth, an expected monetary value or gains and losses against a pre-established reference. The valuation or utility is driven by a set of factors that may be collected and perceived using a formulation. The way portfolio insurance strategies fit the rationality in each of the explanatory theories enhances a possible segmentation on investors appetite for this type of products. We find that investors with descriptive utility functions under expected utility theory are not potential buyers of portfolio insurance strategies, except in very specific market conditions: scenarios of low expected returns and increasing volatility. That situation is also visible under mean variance analysis, where a flight to safety also depicts some valuation on protective strategies with upside potential. These results confirm our previous work on portfolio insurance analysis where we found that only on prospect theory investors would select portfolio insurance strategies.