Goal-Directed Portfolio Insurance

Abstract

In an investment process, there is usually a goal implicitly or explicitly designated by an investor. However, traditional constant proportion portfolio insurance (CPPI) strategy considers only the floor constraint but not the goal aspect. In addition, empirical evidences show that a mutual fund manger’s risk-attitude changes when the mid-year performance outperforms or under-performs the benchmark. There seems to be two contradictory risk-attitudes according to different studies: low wealth risk aversion and high wealth risk aversion. Although low wealth risk aversion can be explained by the CPPI strategy, high wealth risk aversion can not be explained by CPPI. We argue that these contradictions can be explained from two perspectives: the portfolio insurance perspective and the goal-directed (or goal-seeking) perspective. This paper proposes a goal-directed (GD) strategy to express an investor’s goal-directed trading behavior and combines it with the portfolio insurance perspective to form a goal-directed constant proportion portfolio insurance (GDCPPI) strategy. In order to compare these 3 strategies, we build an effectiveness measure using deviation of absolute distance. From our statistical test results, the GDCPPI strategy dominates the other two strategies under this measure. We also apply the genetic algorithm (GA) technique to find a satisfactory set of parameter values for the GDCPPI strategy to improve its performance.