IDEAS home Printed from https://ideas.repec.org/a/taf/ufajxx/v53y1997i4p73-79.html
   My bibliography  Save this article

Investments with Downside Insurance and the Issue of Time Diversification

Author

Listed:
  • Liang Zou

Abstract

Of two insurance policies that guarantee the same minimum rate of return on a portfolio and differ only in their time horizons, which is riskier? This study shows that if the minimum rate is lower than the risk-free rate, and if the risk is measured by the cost of insurance, then the degree of risk is not a monotonic function of the policy's time horizon. For every positive level of concession rate—defined as the risk-free rate minus the insured rate—the cost of such insurance peaks at a finite time horizon. This peak cost horizon is typically between 5 and 15 years. The higher the concession rate (or the lower the volatility of the insured portfolio), the shorter this peak-cost time horizon is. Thus, although a 5-year insurance policy can be much riskier than a 1-year policy, it can also be riskier than a 30-year policy.

Suggested Citation

  • Liang Zou, 1997. "Investments with Downside Insurance and the Issue of Time Diversification," Financial Analysts Journal, Taylor & Francis Journals, vol. 53(4), pages 73-79, July.
    • Handle: RePEc:taf:ufajxx:v:53:y:1997:i:4:p:73-79
    DOI: 10.2469/faj.v53.n4.2102
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.2469/faj.v53.n4.2102
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.2469/faj.v53.n4.2102?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:ufajxx:v:53:y:1997:i:4:p:73-79. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/ufaj20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.