Constant Proportion Portfolio Insurance


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Constant Proportion Portfolio Insurance

A trading strategy that sets a floor on a portfolio value by investing in a risky and a riskless asset such that if the risky asset falls to its lowest expected value, the portfolio value will be at the floor. The weights are altered as the asset values change. This limits the downside risk while maintaining a potential upside through the exposure to the risky asset. This is analogous to buying a put option on the portfolio. Also see Portfolio Insurance.
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Unfortunately, these contributions look closely into most popular products like stop-loss, synthetic put, and constant proportion portfolio insurance techniques (see, [33-36]).
More recent products have also included auto-rebalancing features, based on constant proportion portfolio insurance (CPPI) algorithms, which drive dynamic asset allocation within individual volatility funds and across asset classes.
The constant proportion portfolio insurance strategy is based on allocation among two financial assets: a riskless asset, denoted by B, which allows a cash reserve (riskless interest rate denoted by r); a risky asset, denoted by S, which is usually a stock index.

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