Jerusalem School of Business, Hebrew University, Israel and the Finance Department, The Wharton School, University of Pennsylvania, respectively. We wish to thank Gunther Francke, Bruce Jacobs, and Richard Rogalski for helpful discussions on this topic. All errors are, of course, ours.
On the Optimality of Portfolio Insurance
Article first published online: 30 APR 2012
1985 The American Finance Association
The Journal of Finance
Volume 40, Issue 5, pages 1341–1352, December 1985
How to Cite
BENNINGA, S. and BLUME, M. (1985), On the Optimality of Portfolio Insurance. The Journal of Finance, 40: 1341–1352. doi: 10.1111/j.1540-6261.1985.tb02386.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
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.