Definition of the strategy

CPPI or Constant Proportion Portfolio Insurance is a strategy in which the investor sets a floor on the value of his portfolio. Next, two asset classes – a risky asset and a safe (conservative) asset – are used to minimize the risk the portfolio value breaks the floor.

The difference between the start value or the peak of the portfolio and the floor value, is called the cushion. The percentage of the portfolio allocated to the risky asset, is determined by the cushion and a multiplicator (which we call ‘m’). For example, if the start value is 100, and the floor is set to 80, the multiplicator to 3, 60%(20*3) of the portfolio value is allocated to the risky asset. Rebalancing can be done on a regular basis: daily, weekly, monthly, quarterly or even yearly.

Optimal parameter settings

  • Monthly rebalancing is optimal since returns are highest and volatility is lowest with monthly rebalancing periods in comparison to shorter or longer periods.
  • Investors can choose the level of the floor dependent on their risk aversion: with lower floors we get higher returns but maximum drawdown is higher as well.
  • Multiplicators should not exceed 6, since in those cases the floor will be broken (maximum drawdown exceeds the level of the floor). For a floor of 0.7 the multiplicator should not exceed 4 since above 4 returns start to decrease. For floor values of 0.8 and 0.9 multiplicatorvalues of 6 are optimal since they give the best returns.

Results with the different parameter settings can be found in the section about parameter settings.

For whom?

CPPI is best for investors with a short time horizon. In these short investment periods returns are comparable with the returns of SPY, while downside risk is limited. For longer periods, although maximum drawdown is lower for CPPI, this is not a good measure for the downside risk since the annualized returns are never better for CPPI than for SPY in these long investment periods.

Results of CCPI for investment periods of different length can be found here.

CCPI Start-To-Invest

We designed a CPPI strategy for beginning investors: CCPI-Start-To-Invest. With this strategy we get good results in short investment periods while avoiding big losses in the first years of investing. The current results with this CCPI-Start-To-Invest strategy can be found in the section called ‘Our strategies today‘.