Flexible Portfolio Insurance Strategy with Portfolio Selection Models

Portfolio insurance strategies control the risk of a portfolio within a certain level. While protecting the asset value from being below a predefined floor, portfolio insurance strategies also engage in aggressive profiting. Related studies tend to support that portfolio insurance strategies are effective. A recent study found that the selections of the portfolio and the multiplier jointly determine the investment performance. Portfolio insurance strategies can be optimized through certain optimization technique to enhance profitability above the floor. However, the study also found that carefully selected portfolios cannot always prevent gapping from happening. Gapping can still occur even when the investor always selects the minimum risk portfolio. Especially when the financial crisis befell, no portfolio can escape from the gapping caused by the financial crisis, except risk-free assets. According to conventional portfolio insurance strategies, when gapping, the risk position reduces to zero, and all budgets must be invested in risk-free assets. Risk assets are no longer considerable until the budget has been recovered from below the floor, which recovery would be a prolonged process that might take years. Nevertheless, the market often rebounds from the bottom of a sudden drop caused by a major unfavorable factor. Unfortunately, the funds that are all in therapy can do nothing to recover the loss but to helplessly see the market rebound. No related studies have discussed about what besides investing in risk-free assets can actively be done after gapping. Therefore, this study aims to discuss, design and exam possible portfolio selection models applicable both when the budget is above and below the floor.

Project ID:PB10207-0377
External Project ID:NSC102-2410-H182-011