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Constant Proportion Portfolio Insurance (CPPI)

Constant Proportion Portfolio Insurance (CPPI) is an investment strategy that allows investors to manage risk while maintaining exposure to growth assets. The strategy involves dynamically allocating between a risky asset, such as stocks, and a safe asset, like bonds, based on the performance of the risky asset and a pre-determined multiplier. The goal is to protect a certain level of the portfolio’s value while participating in potential upside growth. CPPI is often used to provide downside protection during volatile markets.

Example

An investor using CPPI might allocate more to stocks when markets are performing well, but shift towards bonds if the stock market declines, ensuring a minimum portfolio value is protected.

Key points

• CPPI is an investment strategy that dynamically allocates between risky and safe assets to manage risk.

• The strategy aims to protect a certain level of the portfolio’s value while still allowing for growth.

• CPPI adjusts allocations based on market performance and a set multiplier.

Quick Answers to Curious Questions

The primary goal is to protect a minimum portfolio value while allowing for potential upside by dynamically shifting between risky and safe assets.

CPPI adjusts asset allocation based on the performance of the risky asset and a pre-determined multiplier, increasing exposure to risky assets in a rising market and reducing it during declines.

Investors seeking downside protection while still wanting to participate in market growth may use a CPPI strategy.