Investigation of portfolio strategies by means of simulation

Abstract

Portfolio insurance strategies are constructed to limit an investors loss but still reward them when the market goes up. In this thesis we compare two portfolio insurance strategies, Constant proportion portfolio insurance (CPPI) and Option based portfolio insurance. This is done by simulating a stock pattern with two different models, Irrational fractional brownian motion and Constant elasticity of variance. We also simulate an interest curve for which we price a Zero coupon bond (ZCB). This is also done by using two different models, Ho-Lee and Black-Derman-Toy. The models are implemented in Matlab for which we then do several simulations and analyse what the result would have been if we invested in these stock and bond simulations according to the CPPI and OBPI portfolios. We found that the OBPI portfolio is safer when the market goes down and usually the CPPI portfolio performs better in upward markets. But there are exceptions when the OBPI portfolio surprisingly performs better than the CPPI portfolio when we act as an aggressive investor even in upward markets. In general, however, the OBPI portfolio seems to be a better choice when the market conditions are uncertain while the CPPI portfolio might be good for a more risk taking investor or if the market is expected to rise.