Numerical Analysis And Empirical Study On Portfolio Insurance Theory

Portfolio insurance Theory once was one of the most popularinvestment strategies among American pension fund managers in the1980s. Recently many Chinese mutual fund companies repackaged thisconcept as their main investment tool.However, will this once failed strategy prove effective in China?What are the key factors which influence its performance?This Paper tried to find the answer through theoretical analysis,numerical simulation and empirical studies.After introducing the basic concept of portfolio insurance,this paper studied the portfolio performance by Monte Carlosimulation. We generated stochastic stock price series to simulatedifferent stock market conditions by varying the model'sparameters.To study the strategy's performance under real market movements,we used the S&P500 index and the T-bill rates from 1961 to 2004.For Chinese market we used Shanghai stock exchange composite indexand the deposit rates. We compared and contrasted the results ofOBPI, CPPI and buy-and-hold strategy.We found that among many factors which can influence thestrategy's result, the specific path is the most important one.Compared to that, the commission cost is negligible. Due to the largevolatility of Chinese stock market, we found that neither CPPI norOBPI is an ideal strategy.