Why CPPI Returns Can Fall at High Floor Levels

Summary

This document describes a question about how realized returns from a Constant Proportion Portfolio Insurance strategy change as its floor is varied. The investor compares a fully bond-invested portfolio at a 100% floor, a fully risky-market portfolio at a 0% floor, and intermediate floors. The reported pattern is negative returns for relatively high floors, followed by positive returns at lower floors that approach the market return.

The document does not provide an explanation or supporting analysis; it asks why the outcome does not interpolate between the two endpoints. It offers no details about the implementation, market path, rebalancing, multiplier, or transaction costs, so the reported pattern cannot establish a general property of CPPI. Those missing assumptions would be needed to diagnose whether the behavior follows from the strategy mechanics or the particular simulation.

Key ideas

• The document asks how CPPI realized returns vary as the portfolio floor changes.
• It reports negative returns at some high intermediate floors and positive returns at lower floors.
• The endpoints are described as bond-only at a full floor and market-only at a zero floor.
• The document provides no method or evidence explaining the non-linear return pattern.

Tags

# CPPI Returns for different floors


# CPPI Returns for different floors












I am new to the topic of Constant Proportion Portfolio Insurance, and have implemented it in `R` for the first time.

Now if I calculate the cumulative return of the CPPI portfolio corresponding to different floors ($100$%, $95$%, ..., $0$%) i get the following result:

For $100$%, I obviously invest everything into a bond all the time, thus my return is the risk-free interest rate $r=1$%.

For $0$%, I invest everything into the risky market, yielding a return equal to that of the market $\mu=10$%.

Now in between both extremes, I do not quite understand the behaviour of the realized returns: They are negative for high floor values ($90$% - $60$%), but then suddenly become positive for floor $\le 40$% finally converging to $\mu$.

Why is that? Why doesn´t it interpolate, but drop off first?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.