A Comparative Analysis of Alternative Portfolio Insurance Strategies

Abstract

Literature within the field of Portfolio Insurance (PI) provides no clear evidence for or against the usefulness of implementing PI strategies. The goal of this thesis is to investigate the real- life performance, using out-of-sample testing, of different PI strategies on the S&P 500 index. The strategies we investigate are the Protective Put (PP) strategy, the Cash Call (CC) strategy, the Constant Proportion Portfolio Insurance (CPPI) strategy, the Stop Loss (SL) strategy and a Moving Average (MA) strategy. We compare the performance of the strategies against a passive Buy-and-Hold (BH) strategy. We find that theMAand SL strategy outperforms the BH strategy, but statistical evidence is weak, while the PP, CC, and CPPI strategy underperform the passive strategy. We discuss the results and make suggestions of why option-based strategies and the CPPI strategy perform poorly.