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Abstract
Legal borrowing restrictions are generally claimed to limit portfolio insurance performance. We explore two alternative rebalancing rules that aim to pick up excess return subject to a borrowing constraint. One set of rules manages a volatility target for the risky assets, a second set of rules manages the floor. Considering real life trading conditions, our simulation results confirm that the borrowing constraint lowers average returns. The risk-adjusted performance however increases, so there is essentially nothing wrong with the legal prohibition to borrow. Still, managing the floor enhances risk-adjusted performance even more. Tweaking the volatility of the risky assets does not.
TOPICS: Legal/regulatory/public policy, portfolio construction, risk management, performance measurement
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Don’t have access? Click here to request a demo
Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600