Constant proportion portfolio insurance
What is constant proportion portfolio insurance?
Constant proportion portfolio insurance (CPPI) is a trading strategy that allows investors to maximise upside potential and lower downside risk.
With the help of constant proportion portfolio insurance, investors can take part in investment opportunities that offer promising returns, but carry high levels of risk.
Where have you heard about constant proportion portfolio insurance?
You may have heard constant proportion portfolio insurance mentioned in relation to other convex strategies that allow investors to maximise profit and limit losses during unstable or falling markets.
What you need to know about constant proportion portfolio insurance.
Investors must allocate the assets in their portfolio, according to their differing levels of risk and reward. Risky assets include mutual funds and equities, while cash and treasury bonds are considered to be risk free assets.
For the strategy to work an investor has to set what’s called a “cushion” value, which is the initial value of the product minus the minimum value necessary to provide a return at maturity.
A multiplier and the cushion value will determine how the assets are allocated and the portfolio’s exposure.
Find out more about constant proportion portfolio insurance.
Risky assets are by their very nature uncertain and a profit or return is not guaranteed. If your exposure is too high there is a high risk of loss.