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The Journal of Wealth Management

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Article

On the Popularity of the CPPI Strategy: A Behavioral-Finance-Based Explanation and Design Recommendations

Hubert Dichtl and Wolfgang Drobetz
The Journal of Wealth Management Fall 2010, 13 (2) 41-54; DOI: https://doi.org/10.3905/jwm.2010.13.2.041
Hubert Dichtl
is an asset management consultant at Alpha Portfolio Advisors in Bad Soden, Germany. dichtl@alphaport.net
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  • For correspondence: dichtl@alphaport.net
Wolfgang Drobetz
is a professor of finance at the Institute of Finance, University of Hamburg in Hamburg, Germany. wolfgang.drobetz@wiso.uni-hamburg.de
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  • For correspondence: wolfgang.drobetz@wiso.uni-hamburg.de
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Abstract

The constant proportion portfolio insurance (CPPI) strategy is frequently used on both the institutional and the retail sides of the asset management industry. While standard finance theory struggles to justify its popularity, this article attempts to explain the widespread use of the CPPI strategy by referring to elements of behavioral finance. We run bootstrap as well as Monte Carlo simulations for the CPPI strategy and for simple benchmark strategies in order to evaluate the outcomes using cumulative prospect theory. Our simulation results indicate that the CPPI strategy is the preferred strategy for a prospect theory investor. The analysis provides hints at how a CPPI-based investment product should be designed in order to meet the preferences of a prospect theory investor as well as possible.

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The Journal of Wealth Management: 13 (2)
The Journal of Wealth Management
Vol. 13, Issue 2
Fall 2010
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On the Popularity of the CPPI Strategy: A Behavioral-Finance-Based Explanation and Design Recommendations
Hubert Dichtl, Wolfgang Drobetz
The Journal of Wealth Management Jul 2010, 13 (2) 41-54; DOI: 10.3905/jwm.2010.13.2.041

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On the Popularity of the CPPI Strategy: A Behavioral-Finance-Based Explanation and Design Recommendations
Hubert Dichtl, Wolfgang Drobetz
The Journal of Wealth Management Jul 2010, 13 (2) 41-54; DOI: 10.3905/jwm.2010.13.2.041
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  • Article
    • Abstract
    • DIFFERENT STRATEGIES TO PROVIDE PORTFOLIO INSURANCE
    • A SIMPLE BACKTEST: RISK–RETURN CHARACTERISTICS OF THE CPPI STRATEGY
    • PROSPECT THEORY VERSUS EXPECTED UTILITY THEORY
    • RESULTS OF BOOTSTRAP SIMULATIONS
    • RESULTS OF MONTE CARLO SIMULATIONS
    • HOW SHOULD CPPI-BASED PORTFOLIO INSURANCE PRODUCTS BE DESIGNED?
    • CONCLUDING REMARKS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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