Constant Proportion Portfolio Insurance
intermediateportfolio insurancedynamic allocationfloor
A dynamic strategy that maintains a floor on portfolio value while allowing leveraged exposure to risky assets through a multiplier mechanism.
Parameters
1000000$
100000$10000000$
800000$
50000$9500000$
5×
1×10×
5%
-50%50%
Portfolio Allocation
$1,000,000 (100%)
Risky AssetsSafe Assets
Cushion = $1,000,000 - $800,000 = $200,000
Risky = 5 × $200,000 = $1,000,000
Safe = $1,000,000 - $1,000,000 = $0
Cushion
$200,000
Risky Allocation
100%
Safe Allocation
0%
After Return
$1,050,000
P&L
+$50,000
Scenario Analysis
Understanding CPPI
Three Key Concepts
Floor Value (F)
Minimum acceptable portfolio value
Cushion (C)
Distance above the floor: V - F
Multiplier (M)
Leverage applied to cushion
The Formulas
Dynamic Rebalancing
As the portfolio value changes, the allocation automatically adjusts. When the cushion shrinks (market falls), the risky allocation decreases — protecting the floor. When the cushion grows (market rises), risky allocation increases — amplifying gains.
CPPI vs Static Allocation
| Factor | CPPI | Static 60/40 |
|---|---|---|
| Floor protection | Yes — dynamic | No |
| Upside capture | Leveraged via M | Fixed 60% |
| Rebalancing | Continuous | Periodic |