Abstract

Portfolio Insurance (PI) is a trading intensive strategy that attempts to protect a portfolio from falling below a prespecified level in an adverse market and to add return in a favourable environment. The primary objective of this research is to see whether or not portfolio insurance (PI) can be used successfully as an asset allocation and risk management tool for fixed income securities. Many strategies exist to realize this objective. We propose to use Constant Proportion Portfolio Insurance (CPPI). Specifically, we want to see if CPPI can be used to manage a Canadian bond portfolio so as to reduce losses in a falling market and to add gains in a favourable market. CPPI is based on the work of Hakanoglu (1989), Black & Jones (1987) and Perold (1986)