Abstract
Since the inception of Modern Portfolio Theory, investors and fund managers have continuously sought the ideal tool to balance risk management with opportunities for growth. Several strategies have been introduced and evaluated in controlled environments. In this study, we evaluate the effectiveness of portfolio insurance strategies when the underlying asset is modelled using a Bilateral Gamma process and a Merton’s Jump process. A comprehensive analysis is conducted, encompassing both theoretical simulations and historical backtesting. We evaluate the performance of strategies such as Constant Proportion Portfolio Insurance (CPPI), Protective Put, Collar, Zero-Cost Collar, Bear Put Spread, Put Spread, and Knock-In Barrier Option. Key performance metrics, including annualized return, volatility, Sharpe ratio, Sortino ratio, Calmar ratio, and maximum drawdown, are employed to assess the effectiveness of these strategies.
The results of the study suggest that no single strategy can outperform all other strategies in all market conditions. The choice of strategy depends on the market conditions as well as the investor’s risk tolerance. While some strategies, like the Knock-In Barrier option, offer high potential returns, they also come with significant risk. On the other hand, strategies like CPPI provide a more balanced approach, offering moderate returns with lower risk.
The study highlights the importance of considering both the theoretical properties and empirical performance of portfolio insurance strategies. By understanding the strengths and weaknesses of different strategies, investors can make informed decisions to protect their portfolios from downside risk while maximizing potential returns.