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On the Optimality of Portfolio Insurance
Author(s) -
BENNINGA SIMON,
BLUME MARSHALL
Publication year - 1985
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1985.tb02386.x
Subject(s) - asset (computer security) , portfolio insurance , portfolio , basis risk , business , investor profile , actuarial science , financial economics , risk aversion (psychology) , economics , replicating portfolio , capital asset pricing model , expected utility hypothesis , finance , portfolio optimization , behavioral economics , computer science , computer security
This paper examines the optimality of an insurance strategy in which an investor buys a risky asset and a put on that asset. The put's striking price serves as the insurance level. In complete markets, it is highly unlikely that an investor would utilize such a strategy. However, in some types of less complete markets, an investor may wish to purchase a put on the risky asset. Given only a risky asset, a put, and noncontinuous trading, an investor would purchase a put as a way of introducing a risk‐free asset into the portfolio. If, in addition, there is a risk‐free asset and the investor's utility function displays constant proportional risk‐aversion, then the investor would buy the risk‐free asset directly and not buy a put. In sum, only under the most incomplete markets would an investor find an insurance strategy optimal.