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Abstract
Legal borrowing restrictions are generally claimed to limit portfolio insurance performance. This article explores 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, and a second set of rules manages the floor. Considering real-life trading conditions, the authors’ simulation results confirm that the borrowing constraint lowers average returns. The risk-adjusted performance increases, however, 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.
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US and Overseas: +1 646-931-9045
UK: 0207 139 1600