Dynamically opted protection envelope (DOPE): A cost-effective strategy of insuring an investment portfolio

Sukanto Bhattacharya, Kuldeep Kumar

Research output: Contribution to journalArticleResearchpeer-review

Abstract

Popular ways of hedging downside risk of a stock portfolio is by means of a constant proportion portfolio insurance (CPPI) strategy or by means of an options-based portfolio insurance strategy (OBPI). However both have drawbacks in terms of practical applicability given transaction costs. Moreover they are not useful in times of very low liquidity e.g. in a market crash. Here we shall first review the common portfolio insurance techniques and then posit an alternative approach using a zero-coupon bond to extract downside coverage to the extent desired by an investor. While the posited strategy will not guarantee full downside protection for the entire investment horizon, it is unaffected by transaction costs resulting from need to periodically reallocate funds and is a lot easier to implement practically compared to options-based strategies. Unlike CPPI and OBPI, it will work in a crash situation too.
Original languageEnglish
Pages (from-to)38-46
Number of pages9
JournalInternational Research Journal of Finance and Economics
Issue number10
Publication statusPublished - 2007

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Investment portfolio
Portfolio insurance
Proportion
Transaction costs
Guarantee
Investors
Liquidity
Zero-coupon bond
Downside risk
Crash
Investment horizon
Market crash
Hedging

Cite this

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Dynamically opted protection envelope (DOPE) : A cost-effective strategy of insuring an investment portfolio. / Bhattacharya, Sukanto; Kumar, Kuldeep.

In: International Research Journal of Finance and Economics, No. 10, 2007, p. 38-46.

Research output: Contribution to journalArticleResearchpeer-review

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