Enhancing balanced portfolios with cppi methodologies – insights from a simulation exercise

We investigate if using a CPPI-style methodology it is possible to “improve” the distribution of portfolio returns from the point of view of an investor holding a balanced portfolio with different allocations in Equities, and whose concern is to avoid significant negative returns and in general to maximize the skew of the returns distribution, with a yearly horizon. The starting point of the analysis is a traditional balanced portfolio investing in a constant mix of asset classes. The utility preference structure that underlies the analysis is that of an investor that is particularly adverse to large negative returns, and is willing to sacrifice (average) expected returns to reduce the severity of expected losses. This is very similar to a “safety first” approach. Hence, we will primarily be concerned with negative Skew, drawdown, volatility as negative properties of the analyzed portfolio strategies that we are seeking to minimize