CPPI first analysis

A short description of the CPPI strategy can be found in the introduction : CPPI introduction.

To illustrate the CPPI strategy, in this first part we will perform an analysis based on adjusted closing prices of the S&P500 index over a very long timeframe.

Summary of the first analysis

  • Strategy: CPPI
  • Risky Asset: S&P 500
  • Fixed yearly return of the safe asset: 0.5%
  • Floor: 80% of the previous peak
  • Multiplicator: 3
  • Start Value: 100
  • Rebalancing: monthly

Results

Figure 1 CCPI S&P500 account value, peak and floor since 1927
Figure 2a CCPI S&P500 since 1993
Figure 2b CCPI S&P500 since 1993 with evolution S&P500
Figure 3 CCPI S&P500 since 1993: weigth of S&P500 in CCPI portfolio

Analysis

In figure 1 we see the results of the CPPI strategy with S&P500 as risky asset, starting from 1927. Over this very long time period the CAGR of the S&P500 was 5.8%; for the CPPI strategy this was 3.1%. Maximum drawdown for S&P500 was 86% , while CPPI had a max drawdown just beneath 20%.

Figure 2a shows the same results but starting from 1993. In this time period the CAGR for both S&P500 and the CPPI strategy were higher: 10.3% and 5.3% respectively. In figure 2b the same graphs are plotted but we plotted the results for the S&P500 as well. This way the difference between a CAGR of 10% and 5% over a 27-year period becomes extremely obvious. So, although with CPPI we can limit the downside risk of our investments, this comes with a much lower compounded return over long time periods. We will demonstrate this effect more extensively in one of the next sections.

In figure 3 the evolution of the weight of the S&P500 in the CPPI portfolio is shown. Since the floor is set at 0.8 of the previous peak, the maximum size of the cushion is 0.2. With the multiplicator set at three, the maximum weight of the risky asset (S&P500 in this case) is 0.6 (3*0.2).

What’s next?

In the next section we will evaluate the impact of different parameter settings.

CPPI Parameter settings