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What is constant proportion portfolio insurance (CPPI)?









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发表于 2020-9-7 13:18:53 | 显示全部楼层 |阅读模式
What is constant proportion portfolio insurance (CPPI)?
Understanding Constant Proportion Portfolio Insurance (CPPI)
Constant Proportion Portfolio Insurance (CPPI) allows aninvestor to maintain exposure to the upside potential of a risky asset whileoffering a capital guarantee against downside risk. The result of the CPPIstrategy is somewhat similar to buying a call option, but it does not useoption contracts. Therefore, CPPI is sometimes referred to as a convexstrategy, as opposed to a "concave strategy" as a constant mix.Financial institutions sell CPPI products on a variety of risk assets,including stocks and credit default swaps.
CPPI is a strategy to combine the advantage of exposure tothe equity market with investments in a conservative financial instrument. Thisis done by assigning a specifically calculated investment percentage to a riskaccount.
A multiplier is used to determine the amount of risk aninvestor is willing to take.
Investors can rebalance their positions on a monthly orquarterly basis.
How Constant Proportion Portfolio Insurance (CPPI) Works
The investor will make an initial investment in the riskasset equal to the value of: (Multiplier) x (value of the cushion in dollars)and will invest the rest in the conservative asset. The value of the multiplieris based on the investor's risk profile and is obtained by first asking whatthe maximum loss in a day of the risk investment could be. The multiplier willbe the inverse of that percentage. As the value of the portfolio changes overtime, the investor will rebalance according to the same strategy.
CPPI consists of two accounts: a risk account and a securityaccount. As their names indicate, both accounts serve specific purposes in anindividual's overall investment strategy. The risk account is leveraged withfutures holdings to hedge against the downside of significant exposure toequities. The funds are dynamically transferred between the two accounts basedon the economic environment.
The schedule for rebalancing is up to the investor, withmonthly or quarterly examples being frequently cited. Typically, CPPI isimplemented over five-year periods. Ideally, the value of the cushion will growover time, allowing more money to flow into the risk asset. However, if thebuffer falls, the investor may need to sell a portion of the risk asset to keepthe asset allocation targets intact.
One of the problems with implementing a CPPI strategy isthat you do not immediately "de-risk" your holdings when markets movein the opposite direction. A hypothetical CPPI strategy on a five-yearinvestment time horizon would have underperformed the S&P 500 for severalyears after the 2008 financial crisis.
CPPI example
Consider a hypothetical portfolio of $ 100,000, of which theinvestor decides that $ 90,000 is the absolute floor. If the portfolio falls to$ 90,000 in value, the investor would move all assets to cash to preservecapital.
If one decides that 20 percent is the maximum chance of"falling", the value of the multiplier will be (1 / 0.20), or 5.Multiplier values ​​between 3 and 6 are very common. Based on the informationprovided, the investor would allocate 5 x ($ 100,000 - $ 90,000) or $ 50,000 tothe risk asset, with the remainder going to the cash or conservative asset.

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