A Performance Evaluation of Constant Proportion Portfolio Insurance:

An Application of the Economic Index of Riskiness

(Richard Lu)
Associate professor in the Department of Risk Management and Insurance, Feng
Chia University,100 Wenhwa Rd., Taichung 40724, Taiwan, E-mail:
rclu@mail.fcu.edu.tw,
Tel: 886-4-24517250 ext.4132

(Ling-Yu Hsiung)
Ph.D. Student in the Program of Finance, Feng Chia University, 100 Wenhwa Rd.,
Taichung 40724, Taiwan, E-mail: lingyubear@gmail.com.tw,

ABSTRACT
The investment performance of constant proportion portfolio insurance (CPPI)
strategies is evaluated by using the economic performance measure. This
performance measure generalizes the Sharpe measure by replacing the standard
deviation by the economic index of riskiness proposed by Aumann and Serrano
(2008). For the performance evaluation, the return distributions are generated by
Monte Carlo simulations. The results show that whether the CPPI strategies can
outperform a buy-and-hold (BH) strategy depends on the level of multiplier, the
performance measure, and the market scenario. The multiplier is the most important
factor that determines whether the CPPI can outperform the BH. When the multiplier
is no more than three, the CPPI almost always outperforms the BH under the normal
return and volatility market. However, if the multiplier is five, which is a commonly
used value in applications, the CPPI is outperformed by the BH under all market
scenarios studied.
Keywords: constant proportion portfolio insurance, economic index of riskiness,
economic performance measurement

1. Introduction
Portfolio insurance (PI) is an investment strategy of eliminating downside risk or
obtaining guaranteed minimum returns while preserving some upward potential in
rising markets. This payoff pattern seems attractive for most investors. Portfolio
insurance can create various return-risk profiles by setting different minimum values
or floors for the portfolio. Setting a high floor means a high level of protection or
low risk for the portfolio, but there is also a low expected return. In contrast, a low
floor means a high-risk, but high-return profile. Portfolio insurance is a decision
making strategy involving different return-risk trade-off patterns.
To implement PI, Leland and Rubinstein (1976) first proposed an option-based
strategy by buying a put option on the underlying portfolio. If the put is not
available, it can be created synthetically. The put option, like a general insurance
contract, provides the coverage when losses occur. Those who insure their portfolios
have to pay the put price. Thus, portfolio insurance, in fact, has to sacrifice some
return for the risk reduction. Portfolio insurance is a decision making approach with
a return-risk trade-off.
To insure a portfolio, another approach is constant proportion portfolio insurance
(CPPI) introduced by Perold (1986) and Black and Jones (1987). In addition to the
floor setting, those who use CPPI strategies have to set a multiplier, which
determines how aggressively they want to participate in the up market. We have
shown that, comparing with a buy-and-hold (BH) strategy, the multiplier is the most
important factor that determines whether the CPPI can outperform the BH.
Is it better to have a portfolio insured? In a Black-Scholes economy with one
risk-free asset and one risky asset, for a hyperbolic absolute risk aversion (HARA)
utility investor, Merton (1971) and Brennan and Solanki (1981) derived the optimal
investment payoff, which consists of a floor and a power on the risky asset price. As
demonstrated by Perold and Sharpe (1988), the optimal payoff can be constructed by
CPPI strategies. Thus, theoretically, PI should outperform BH, which is no
protection at all. However, there is no clear empirical evidence to support PI. As
Dichtl and Drobetz (2011) pointed out, the standard expected utility theory cannot
provide an explanation for using PI strategies. They showed that PI is preferred by
prospect theory investors, but not expected utility theory investors. In this paper, we
reevaluate the performance of PI again according to an economic performance
measure. Based on this performance measure, we provide evidence that justifies PI
for expected utility theory investors.
Because of the downside protection, there is a cut-off point and no left tail for the
return distribution of an insured portfolio. Also, by CPPI, how the distribution skews
to the right depends on the floor and the multiplier chosen. Thus, the return
distribution is asymmetric and does not conform to a normal distribution. To
evaluate the performance, we need to consider the non-normality.
To evaluate relative performance, stochastic dominance rules may provide a
solution for investors with quite broad utility functions. Annaert, Van Osselaer, and
Verstraete (2009) used the stochastic dominance rules to compare PI strategies with
a BH strategy. Their historical simulated results showed that the BH strategy did not
stochastically dominate the portfolio insurance strategies, or vice versa. Thus,
stochastic dominance cannot provide a clear comparison or ranking of the return
distributions. This means stochastic dominance can provide partial rather than
complete ranking. This limitation can be attributed to the broad utility functions
setting. Leshno and Levy(2002) pointed out that the set of utility functions under the
second-order stochastic dominance includes all risk-averse utility functions, and
2

some of them only conform to very few individuals preferences.

By setting the utility functions, which can represent most individuals
preferences rather than all individuals, Leshno and Levy (2002) propose using
almost stochastic dominance instead of stochastic dominance to rank distributions.
This leads more closely to a complete ranking. By using the almost stochastic
dominance rules, Fu, Hsu, Huang, and Tzeng (2014) ranked the return distributions
between PI strategies and BH strategy. They found that the PI strategies were
dominated by the BH strategy in the sense of almost first-order and second-order
stochastic dominance only for long investment horizons. For a one-year investment
horizon, like the results of Annaert et al. (2009), neither one dominates the other.
Another way to compare PI with BH without the partial ranking problem is to
use some performance measures, such as the Sharpe ratio, the Sortino ratio, and the
Omega measure. However, recent studies indicate using these performance measures
do not provide any clear support that PI could outperform BH from. (Cesari and
Cermonini, 2003; Annaert et al., 2009; Dichtl and Drobetz, 2011).
When evaluating investment performance, the Sharpe ratio is the performance
measure popularly used. However, except for investors with quadratic utility
functions, the Sharpe ratio will not be an appropriate performance measure if
investment returns are not normally distributed. PI often creates asymmetric return
distributions, and therefore it is advisable to not just consider the first two moments
of the distribution, which are used in the Sharpe ratio.
To get a complete ranking and consider the non-normality, this paper uses an
economic performance measure proposed by Homm and Pigorsch (2012). This
performance measure is similar to the Sharpe ratio. However, instead of using
standard deviation as risk measure, the economic performance measure uses the
economic index of riskiness proposed by Aumann and Serrano (2008) (AS index
henceforth). Under this setting, the performance measure can account for mean,
variance and higher moments of return distributions. In addition, this confirms the
Sharpe ratio ranking if returns are normally distributed. By using the economic
performance measure, we provide evidence to justify portfolio insurance under the
standard expected utility theory without resorting to prospect theory.
The remainder of this paper is organized as follows. Section 2 presents the
constant proportion portfolio insurance model. In Section 3, we demonstrate the
simulation design. Then, performance evaluation is discussed in section 4. Section 5
provides the numerical results and discussion. The final section is the conclusion.

2. Constant Proportion Portfolio Insurance Strategy

There are three dynamic portfolio insurance strategies commonly used: stop-loss
strategy, synthetic put strategy, and constant proportion strategy. In this paper, we
only discuss and evaluate the CPPI strategies, because they can replicate the optimal
investment payoff for HARA utility investors. In fact, as demonstrated below, the
three dynamic strategies have quite similar structures. Thus, CPPI is a good
representative of PI.
To illustrate the implementation of CPPI strategies, we use a twoasset model: a
risky asset and a risk-free asset. In constructing a CPPI strategy, an investor has to
initially select a floor FT and a multiplier (m). The floor is the minimum below
which he does not want the portfolio value to fall at the end of the investment period.
Thus, given an initial amount of investment W 0 , FT /W 0 is defined as the level
of protection. A higher floor leads to a higher percent of principal protected.
For a typical constant proportion strategy, the risky asset position S t at time t is
determined by
3

t
S t =m( PV t ( F T )) if W t > PV t ( FT )

(1)

where W t is the total investment value at time t, PV t (F T ) is the present value

of the floor at time t, and W t PV t (F T ) is referred to as a cushion. The remainder
of the portfolio W t S t is invested in a risk-free asset. Thus, given a fixed amount
of the cushion, a higher multiplier leads to higher positions in the risky assets. The
higher the multiplier is, the more aggressive the CPPI strategies are. Whenever
W t PV t (FT ) , only the risk-free asset is held and there will be no investment in
the risky assets for the rest period. Thus, the CPPI strategy is a dynamic strategy for
asset allocation. The investor also has to decide when to reset the asset allocation
based on the above equation. However, if m = 1 and FT =0 , the constant
proportion strategy becomes a static BH strategy. It is an all risky asset investment
throughout the investment horizon. Thus, the buy-and-hold strategy can be regarded
as a type of CPPI strategy with no downside risk protection (Perold and Sharpe,
1988).
There are unconstrained as well as constrained CPPI strategies. When the
multiplier is high and the floor is low, it is possible that the risky asset position will
exceed the total investment. In this case, the unconstrained strategy allows short
positions in the risk-free asset or financial leverage by borrowing at the risk-free
rate. However, the constrained strategy rules out the short positions or using the
leverage. A stop-loss strategy can be regarded as the constrained strategy with a very
high multiplier (Black and Perold, 1992). Also, a BH strategy is a special
constrained CPPI strategy with no floor.
A synthetic put strategy for PI is an option-based strategy. A risky asset plus a
put option on the risky asset is a portfolio that is insured. Instead of buying the put
option, a synthetic put strategy creates the put synthetically by trading the risky asset
and risk-free asset dynamically according to the Black-Scholes option pricing
formula. Thus, in implementing this strategy, investors need additional information
about the volatility for trading assets. By the put-call parity, a synthetic put strategy
is the same as using the cushion in CPPI to buy call options on the risky asset. As the
call options can be replicated dynamically by a portfolio of long positions in the
risky asset and short positions in the risk-free asset. Thus, a synthetic put strategy
can be regarded as a variation of CPPI with a time-varying multiplier (Perold and
Sharpe, 1988).

3. Simulation Design
To generate the return distributions of the CPPI strategies for performance
evaluation, we use a Monte Carlo simulation. We design the simulation by mostly
following the work of Dichtl and Drobetz (2011). The key difference is that we
simulate the return of CPPI strategies with various levels of protection and
multiplier. The details of the setup are as follows.
The risky asset price is assumed to follow a geometric Brownian motion. This
price model can be written as:
1
d ln St ( 2 )dt dwt
2
(1)
where St is the risky asset price at time t, wt is a wiener process, and and
are the drift and volatility parameters. After stochastic integration, the discrete
version becomes
4

S t t S t e (

/ 2 ) t t

(2)
where is a Gaussian white noise with the standard deviation equal to 1. Based
on this equation, we simulate daily returns by setting t=1/250 , =9 11.5
, and =20 30 . There are four market scenarios: low-return and normal
volatility market (where =9% and =20%), low-return and high-volatility
market (where =9% and =30%), normal-return and normal-volatility
market (where =11.5% and =20%), and normal-return and high-volatility
market (where =11.5% and =30%). The normal-return and normalvolatility market corresponds to the scenario of the long-term developed stock
markets, as in Dichtl and Drobetz (2011).
The risk-free asset process is assumed to follow the following equation:
M t +Vt = M t e r Vt
(3)
where r is the risk-free interest rate, Mt is the price at t. In the simulations, the
interest rate is set to 4.5%.
Like most the other similar research works, we simulate the returns of the
constrained CPPI only. To simulate the CPPI strategies, the floor is 100%, 95%,
90%, 85%, or 0% of the initial amount invested. The no protection case (0%) is the
same as a BH strategy. The multiplier is set to five, three, two and one. With the
round-trip transaction costs 0.1%, the asset allocation is reset when the price of the
risk asset moves (up or down) over 2%. The investment horizon is one year. For
every simulation run, we calculate a log return which is based on the following
argument. To get the return distribution, we perform 100,000 simulation runs.
There are detail explanations about the above numbers chosen for simulations in
Dichtl and Drobetz (2011). Thus, we do not repeat them here again.

4. Performance Evaluation
In this section, we first discuss the economic index of riskiness, which is used for
constructing EPM. Then, we present the EPM for performance evaluation in the
following subsection.
4.1 Economic Index of Riskiness
Most performance measures, for instance the Sharpe measure, are kinds of
reward-to-risk measures. The risk measures often adopted are standard deviation,
semi-standard deviation, value at risk, expected shortfall, and so on. However, as
Aumann and Serrano (2008) pointed out, the common drawback of these risk
measure are the violation of monotonicity with respect to second-degree stochastic
dominance (SSD). Thus, even if portfolio A dominates portfolio B in terms of SSD,
and we know that all risk-averse investors prefer A to B, those risk measures may
indicate that portfolio B is less risky than Portfolio A.
The economic index of riskiness, the AS index, is axiomatically derived from the
theory of decision making under risk. The two key axioms are duality and positive
homogeneity. The duality requires the risk index that reflects how less riskaverse individuals accept riskier assets. Thus, it satisfies the above
monotonicity.
Aumann and Serrano (2008) defined the economic index of riskiness for
a risky asset as the reciprocal of the positive risk aversion
parameter of an individual with constant absolute risk aversion
(CARA) who is indifferent between taking and not taking the risky
asset. Under their setup, the AS index must satisfy the following equation:
5

EU ( W +S t S 0 )=U (W ) ,

(4)

where U is the utility function, W is the initial wealth, S t is the

price of the risky asset at time t. Assuming no cash dividend,
S t S 0 is the absolute return of holding the asset for the time
interval. Aumann and Serrano (2008) constructed the index of riskiness by using
an exponential utility function. Thus, the AS index of the risky
asset, AS( S t ) is defined implicitly as follows:
E e(S S )/ AS (S ) =1
t

(5)

They proved that the AS( S t ) is a unique positive number, and

any index satisfying the two axioms will be a positive multiple of
AS( S t ) if some of the absolute return are negative, and the mean of the absolute
return is positive.
Under this above setup, the investment risk is a kind of additive
risk. However, if the individual places the initial wealth in the risky
asset, then the risk becomes a multiplicative risk. For a
multiplicative risk, similar to Aumann and Serranos approach (2008),
Schreiber (2014) defined an economic index of relative riskiness for
a risky asset as the reciprocal of the positive risk aversion
parameter of an individual with constant relative risk aversion
(CRRA) who is indifferent between taking and not taking the risky
asset. Under his setup, the index of relative riskiness must satisfy the
following equation:
S t / S0
W ()

EU

(6)

Schreiber (2014) adopted a power utility and derived the index of

relative riskiness which, in fact, equals the AS index applied to the
log return instead of the absolute return. That is, the index of
relative riskiness, RS( S t ) is defined implicitly as follows:
E e(ln S ln S )/ RS(S )=1
t

(7)

The index of relative riskiness also satisfies positive homogeneity in

t
S1
S
the sense of
), which states t-year investment risk equals

=t RS
RS
one-year investment risk repeated t times. And, if we want to take
out the time value involved, RS( S t ) is defined implicitly as
E e(ln S ln S r t )/ RS (S )=1
t

(8)

Thus, to measure the relative riskiness of a risky asset, we

6

should apply the excess log return to the formula.

4.2 Economic Performance Measurement
To evaluate the performance of the CPPI strategies, we use the economic
performance measure (EPM) proposed by Homm and Pigorsch (2012). This measure
can be regarded as a generalized Sharpe measure, because, under the normality, the
EPM is equivalent to the Sharpe measure ranking. In contrast to the Sharpe measure,
the EPM divides the mean excess return by the AS index instead of the standard
deviation. Both measures are a type of reward-to-risk measure. However, as a risk
measure, the AS index accounts for mean, variance and higher moments of return
distributions, but, for standard deviation, it just considers the second moment, and is
only a perfect risk measure under the normality. Because CPPI strategies have a
floor setting, and participate in the upside market, the resulting return distributions
are often asymmetric and non-normal. Thus, in evaluating the performance, we
should consider higher moments of the return distribution, rather than just the first
two moments that are used in the Sharpe measure.
In Homm and Pigorsch (2012), the EPM is defined as:
E (~r )
EPM=
,
(9)
AS( ~r )
where E( ~r is the expected excess return of an investment portfolio, and AS
~r
) is the AS index of the random excess return. As demonstrated by Homm and

Pigorsch (2012), the EPM has the positive property of monotonicity with respect to
the first-order and second-order stochastic dominance. This property is not held by
most other performance measures (Homm and Pigorsch, 2012).
In applying the EPM, the subtle part is to calculate the AS index. According to
Aumann and Serrano (2008), we can obtain the index by solving AS( ~r ) in the
equation:

~r
AS( ~r )

(10)
E e
=1
Given an empirical distribution or a simulated distribution, without
assuming any distribution function, we can apply Equation (10) and
solve the AS index. This is the so-called nonparametric approach.
By assuming a probability density function for the excess return,
we might derive the formula of the AS index. This will be a
parametric approach if possible. For a normally distributed excess
return, the AS index is equal to the variance divided by two times of the mean
excess return. Thus, the EPM equals two times of the squared Sharpe measure. In
this situation, the two performance measures produce the same ranking.

5. Results of Simulations and Evaluation

In the following tables are the simulated results of investment performance for
the CPPI strategies. The tables are classified by the market volatility and the
multiplier. In each table, the first four central moments of the return distributions, the
AS index, the Sharpe ratio, and the EPM are listed across the specified level of
protection. Table 1 and 2 indicate the results of the CPPI with multiplier equal three
from the normal volatility market and the high volatility market, respectively. For
each table, there are two panels: one for the low-return market and the other for the
normal-return market. In the same way, Table 3 and 4 are the results of the CPPI
with a multiplier that equals five. Table 5 and 6 are for the multiplier that equals two,
7

and Table 7 and 8 are for the multiplier that equals one.1 For the BH, in fact, we can
regard it as a special case of the portfolio insurance with zero protection. As the
percent of the principal protected approaches zero, the CPPI will converge to the
BH. Actually, the simulated results also indicate the convergence.
We first examine the moments of the return distribution across all the tables. As
expected, the higher level of protection leads to the lower expected return and
standard deviation. Thus, CPPI reduces the volatility through eliminating downside
risk. In doing so, CPPI sacrifices some expected return. By looking at the skewness
and kurtosis, both of the BH is slightly higher than a normal distribution. 2 It is
because we use a percentage return instead of a log return. For others, it is obvious
that the CPPI with a higher floor has higher skewness and kurtosis. As expected,
these return distributions are far from a normal distribution.
Then, the standard deviation and the AS index are worth comparing. Standard
deviation is a risk measure used the most commonly, while the AS index is a new
proposed risk measure. In all cases studied here, they produce the same ranking of
riskiness. They both indicate that the CPPI with a higher level of protection has a
lower risk. However, according to the numerical results, the AS index provides a
different degree of riskiness from the standard deviation.
Under non-normality, the standard deviation might no longer be a perfect risk
measure. In this situation, the Sharpe ratio might be also questionable for a
performance measure. In Table 1, we can find that the Sharpe ratio and the EPM
produce very different performance ranking. According to the Sharpe ratio, the BH
has the highest rank. However, by the EPM, the BH is only better that the CPPI with
an 85% level of protection. The EPM gives the CPPI full protection at the highest
rank. Thus, here, we can find that the CPPI outperforms the BH only by using the
EPM.
The CPPI, with multiplier three, performs worse than the BH in the high
volatility market. From the Sharpe ratio or the EPM of Table 2, the BH gets the
highest rank over the CPPI with some level of protection. As Perold and Sharpe
(1988) demonstrated, higher volatility causes the CPPI to incur larger capital losses
because it is a dynamic strategy of buying when the market is high, and selling low
when the market is low.
When the multiplier equals five, the CPPI is outperformed by the BH under all
the market scenarios studied. The EPM and the Sharpe ratio produce the same
ranking. The lower level of the protection is, the better the CPPI performs. Thus,
even though five is the popularly used multiplier, this does not make the CPPI
perform better than the BH. Compared with the multiplier equaling three, the mean
return and the standard deviation are both higher when the multiplier equals five.
However, the percentage increase in the standard deviation is much more than that of
the mean return. Thus, although a high multiplier can create high upside potential in
the sense of mean return, it also raises the volatility. Overall, it worsens the
performance.
When we set the multiplier down to two, the CPPI with the various levels of
protection all outperform the BH under the normal volatility market in the sense of
the EPM. For the high volatility market where we expect the CPPI to perform less
well, the CPPI, with the level of protection over 95%, still performs better than the
BH. Based on the Sharpe ratio, the CPPI is also the better performer, but, the
evidence is weaker than that of the EPM. If the multiplier equals one, the CPPI
always outperforms the BH. Thus, the multiplier is quite important in determining
the performance of the CPPI.
1 Table 5-8 are listed in the Appendix.
2 A normal distribution has zero skewness and kurtosis equal 3.
8

Overall, to find out if the CPPI can outperform the BH under the expected utility
framework, there are three important keys, the performance measure, the market
scenario, and the multiplier. If we use the EPM instead of the Sharpe ratio, there is
more evidence in support of the CPPI. In the normal-return and normal-volatility
market, the CPPI performs better than in the low-return and high-volatility market.
This is consistent with Perold and Sharpe (1988) where they demonstrated that CPPI
would perform relatively well in up and less volatile markets. Finally, the CPPI often
outperform the BH when the multiplier is low. Regardless of the performance
measure or the market scenario, we find that the CPPI is always better than the BH
when the multiplier equals one. Dichtl and Drobetz (2011) used the multiplier five
and Annaert et al. (2009) used 14. The multipliers they used are too high to obtain
the good performers of the CPPI.

Table 1 Simulated Results under the Normal Volatility Market (m=3)

Panel A: Expected Market Return=9%
% of protection 100%
95%
90%
85%
0%(BH)
Mean
0.0524
0.0594
0.0663 0.0731
0.0943
STD
0.0344
0.0718
0.1081 0.1418
0.2214
Skewness
2.1972
2.1568
1.9700 1.7041
0.5893
Kurtosis
12.147
11.454
9.3145 7.2147
3.6419
AS index
0.0576
0.1326
0.2078 0.2800
0.4543
Sharpe ratio
0.2159
0.2006
0.1971 0.1979
0.2228
EPM
0.1290
0.1086
0.1025 0.1002
0.1086
Panel B: Expected Market Return=11.5%
% of protection 100%
95%
90%
85%
0%(BH)
Mean
0.0565
0.0679
0.0792 0.0901
0.1221
STD
0.0369
0.0769
0.1155 0.1508
0.2266
Skewness
2.1160
2.0765
1.8799 1.6074
0.5784
Kurtosis
11.141
10.548
8.5086 6.5744
3.5789
AS index
0.0371
0.0830
0.1291 0.1739
0.2911
Sharpe ratio
0.3118
0.2977
0.2958 0.2991
0.3402
EPM
0.3100
0.2755
0.2647 0.2595
0.2648
Notes: The m in the title is the multiplier for the CPPI. STD stands for the
standard deviation. The AS index is the economic index of riskiness
proposed by Aumann and Serrano (2008). EPM stands for the economic
performance measure.

Table 2 Simulated Results under the High Volatility Market (m = 3)

Panel A: Expected Market Return=9%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0521
0.0587
0.0651
0.0712
0.0944
STD
0.0575
0.1170
0.1707
0.2172
0.3358
Skewness
4.0962
3.4089
2.8055
2.3322
0.9190
Kurtosis
33.9903 21.4436 14.4482 10.4772
4.5322
AS index
0.1641
0.3758
0.5688
0.7331
1.0432
Sharpe ratio
0.1238
0.1170
0.1179
0.1208
0.1472
EPM
0.0434
0.0364
0.0354
0.0358
0.0474
Panel B: Expected Market Return=11.5%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0561
0.0670
0.0776
0.0875
0.1221
STD
0.0616
0.1248
0.1812
0.2292
0.3441
Skewness
3.9995
3.2847
2.6853
2.2235
0.9113
Kurtosis
31.7000 19.8429 13.3583
9.7192
4.4918
AS index
0.1026
0.2292
0.3474
0.4502
0.6682
Sharpe ratio
0.1808
0.1765
0.1800
0.1854
0.2240
10

EPM
0.1085
0.0960
0.0939
0.0944
0.1154
Notes: The m in the title is the multiplier for the CPPI. STD stands for the
standard deviation. The AS index is the economic index of riskiness
proposed by Aumann and Serrano (2008). EPM stands for the economic
performance measure.

Table 3 Simulated Results under the Normal Volatility Market (m = 5)

Panel A: Expected Market Return=9%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0556
0.0667 0.0761 0.0837
0.0942
STD
0.0677
0.1267 0.1686 0.1962
0.2213
Skewness
3.6069
2.3588 1.6892 1.2532
0.5823
Kurtosis
22.3146 10.0556 6.2229 4.5663
3.5961
AS index
0.1399
0.2704 0.3589 0.4118
0.4555
Sharpe ratio
0.1569
0.1710 0.1846 0.1972
0.2225
EPM
0.0759
0.0801 0.0868 0.0940
0.1081
Panel B: Expected Market Return=11.5%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0628
0.0809 0.0960 0.1074
0.1221
STD
0.0751
0.1375 0.1801 0.2065
0.2266
Skewness
3.3795
2.1772 1.5466 1.1458
0.5784
Kurtosis
19.4728
8.8567 5.5932 4.2404
3.5789
AS index
0.0814
0.1622 0.2204 0.2574
0.2911
Sharpe ratio
0.2374
0.2612 0.2830 0.3019
0.3402
EPM
0.2189
0.2215 0.2313 0.2423
0.2648
Notes: The m in the title is the multiplier for the CPPI. STD stands for
the standard deviation. The AS index is the economic index of riskiness
proposed by Aumann and Serrano (2008). EPM stands for the economic
performance measure.

Table 4 Simulated Results under the High Volatility Market (m = 5)

Panel A: Expected Market Return=9%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0544
0.0635 0.0716 0.0785
0.0944
STD
0.1114
0.1898 0.2442 0.2818
0.3358
Skewness
4.8561
3.1399 2.3694 1.8847
0.9190
Kurtosis
34.8032 15.5467 9.9267 7.2838
4.5322
AS index
0.4816
0.7721 0.9295 1.0056
1.0432
11

Sharpe ratio
0.0840
0.0977 0.1087 0.1191
0.1472
EPM
0.0194
0.0240 0.0286 0.0334
0.0474
Panel B: Expected Market Return=11.5%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0610
0.0761 0.0891 0.0996
0.1221
STD
0.1209
0.2027 0.2586 0.2960
0.3441
Skewness
4.5479
2.9388 2.2159 1.7705
0.9113
Kurtosis
30.6556 13.9081 8.9748 6.7236
4.4918
AS index
0.2771
0.4597 0.5622 0.6226
0.6682
Sharpe ratio
0.1322
0.1535 0.1705 0.1845
0.2240
EPM
0.0577
0.0677 0.0784 0.0877
0.1154
Notes: The m in the title is the multiplier for the CPPI. STD stands for
the standard deviation. The AS index is the economic index of riskiness
proposed by Aumann and Serrano (2008). EPM stands for the economic
performance measure.

12

6. Conclusion
In this paper, the investment performance of CPPI strategies is compared with a
buy-and-hold strategy. Because of the downside risk protection and the upside
potential of the CPPI, it generates an asymmetric and non-normal return distribution.
In addition to the Sharpe measure for evaluation, we use the economic performance
measure that generalizes the Sharpe measure to consider the non-normality. The
results show that the CPPI strategies can outperform a buy-and-hold (BH) strategy
under the expected utility theory. To reveal this evidence, the keys are the level of
multiplier, the performance measure, and the market scenario. The multiplier is the
most important factor that determines whether the CPPI can outperform the BH.
With the multiplier being no more than three, the CPPI almost always outperforms
the BH under the normal trend and volatility market. However, if the multiplier is
five, which is a commonly used value in applications, the CPPI is outperformed by
the BH under all market scenarios studied.

13

References
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14

Appendix
Table 5 Simulated Results under the Normal Volatility Market (m = 2)
Panel A: Expected Market Return=9%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0503
0.0549 0.0595 0.0641
0.0942
STD
0.0209
0.0436 0.0663 0.0890
0.2213
Skewness
1.2694
1.2694 1.2694 1.2694
0.5823
Kurtosis
5.9126
5.9126 5.9126 5.9124
3.5961
AS index
0.0333
0.0791 0.1257 0.1726
0.4555
Sharpe ratio
0.2518
0.2261 0.2181 0.2141
0.2225
EPM
0.1579
0.1246 0.1151 0.1104
0.1081
Panel B: Expected Market Return=11.5%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0528
0.0602 0.0677 0.0751
0.1220
STD
0.0220
0.0458 0.0697 0.0936
0.2269
Skewness
1.2739
1.2739 1.2739 1.2739
0.5841
Kurtosis
5.9475
5.9475 5.9475 5.9467
3.6071
AS index
0.0224
0.0514 0.0805 0.1097
0.2921
Sharpe ratio
0.3569
0.3326 0.3249 0.3212
0.3392
EPM
0.3498
0.2969 0.2814 0.2740
0.2636
Notes: The m in the title is the multiplier for the CPPI. STD stands for
the standard deviation. The AS index is the economic index of riskiness
proposed by Aumann and Serrano (2008). EPM stands for the economic
performance measure.
15

Table 6 Simulated Results under the High Volatility Market (m = 2)

Panel A: Expected Market Return=9%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0501
0.0546 0.0591
0.0635
0.0944
STD
0.0328
0.0684 0.1040
0.1395
0.3355
Skewness
2.1451
2.1455 2.1428
2.1099
0.9128
Kurtosis
11.4972 11.5044 11.4294 10.9180
4.4841
AS index
0.0831
0.1987 0.3156
0.4338
1.0415
Sharpe ratio
0.1566
0.1403 0.1352
0.1328
0.1472
EPM
0.0618
0.0483 0.0446
0.0427
0.0474
Panel B: Expected Market Return=11.5%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0527
0.0600 0.0673
0.0745
0.1221
STD
0.0345
0.0721 0.1096
0.1469
0.3445
Skewness
2.1684
2.1686 2.1618
2.1172
0.9176
Kurtosis
11.7517 11.7549 11.6126 10.9709
4.5270
AS index
0.0554
0.1272 0.1996
0.2721
0.6694
Sharpe ratio
0.2234
0.2079 0.2030
0.2009
0.2238
EPM
0.1393
0.1178 0.1115
0.1084
0.1152
Notes: The m in the title is the multiplier for the CPPI. STD stands for the
standard deviation. The AS index is the economic index of riskiness
proposed by Aumann and Serrano (2008). EPM stands for the economic
performance measure.

Table 7 Simulated Results under the Normal Volatility Market (m = 1)

Panel A: Expected Market Return=9%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0481
0.0504 0.0527 0.0550
0.0943
STD
0.0097
0.0203 0.0308 0.0414
0.2210
Skewness
0.5784
0.5784 0.5784 0.5784
0.5785
Kurtosis
3.5894
3.5894 3.5894 3.5894
3.5896
AS index
0.0133
0.0342 0.0561 0.0781
0.4546
Sharpe ratio
0.3219
0.2668 0.2494 0.2409
0.2229
EPM
0.2353
0.1581 0.1372 0.1277
0.1083
Panel B: Expected Market Return=11.5%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0494
0.0530 0.0566 0.0602
0.1221
STD
0.0100
0.0208 0.0317 0.0425
0.2271
Skewness
0.5857
0.5857 0.5857 0.5857
0.5858
Kurtosis
3.6172
3.6172 3.6172 3.6172
3.6175
AS index
0.0096
0.0234 0.0374 0.0516
0.2918
16

Sharpe ratio
0.4359
0.3823 0.3654 0.3572
0.3396
EPM
0.4531
0.3409 0.3093 0.2944
0.2643
Notes: The m in the title is the multiplier for the CPPI. STD stands for
the standard deviation. The AS index is the economic index of riskiness
proposed by Aumann and Serrano (2008). EPM stands for the economic
performance measure.

Table 8 Simulated Results under the High Volatility Market (m = 1)

Panel A: Expected Market Return=9%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0481
0.0504 0.0526 0.0549
0.0944
STD
0.0147
0.0307 0.0468 0.0628
0.3353
Skewness
0.9077
0.9077 0.9077 0.9077
0.9078
Kurtosis
4.4549
4.4549 4.4549 4.4549
4.4552
AS index
0.0307
0.0792 0.1299 0.1811
1.0424
Sharpe ratio
0.2105
0.1742 0.1627 0.1571
0.1472
EPM
0.1009
0.0676 0.0586 0.0545
0.0473
Panel B: Expected Market Return=11.5%
% of protection
100%
95%
90%
85% 0%(BH)
Mean
0.0493
0.0529 0.0565 0.0601
0.1223
STD
0.0151
0.0316 0.0480 0.0645
0.3445
Skewness
0.9196
0.9196 0.9196 0.9196
0.9197
Kurtosis
4.5346
4.5346 4.5346 4.5346
4.5351
AS index
0.0221
0.0539 0.0864 0.1190
0.6673
Sharpe ratio
0.2859
0.2505 0.2394 0.2339
0.2243
EPM
0.1956
0.1468 0.1331 0.1268
0.1158
Notes: The m in the title is the multiplier for the CPPI. STD stands for
the standard deviation. The AS index is the economic index of riskiness
proposed by Aumann and Serrano (2008). EPM stands for the economic
performance measure.

17