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Safety First Portfolio Insurance

Author

Listed:
  • Mark Broadie
  • William Goetzmann

Abstract

In this study, we show how a dynamic insurance program can be implemented within a mean-variance framework. The approach combines elements of the single period safety first idea suggested by Telser and developed by Leibowitz with multiperiod insurance strategies like CPPI and TIPP. The insurance program allows the user to set a probability of hitting a specified floor or target and also allows for changing risk attitudes through time. When the insurance strategy is tested on historical data, the insured portfolio achieves high long-term returns while mostly avoiding long bear markets. In order to understand how the insurance strategy might perform in the future, we simulate returns of the stock market and compare the insurance strategy to buy and hold strategies. An additional benefit of the safety first approach is that it specifies a strategy for underfunded portfolios as well as overfunded portfolios.

Suggested Citation

  • Mark Broadie & William Goetzmann, 2008. "Safety First Portfolio Insurance," Yale School of Management Working Papers amz2632, Yale School of Management.
    • Handle: RePEc:ysm:wpaper:amz2632
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    File URL: https://repec.som.yale.edu/icfpub/publications/2632.pdf
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