A cumulative prospect view on portfolios that hold structured productsA cumulative prospect view on portfolios that hold structured products
Faculty of Applied Economics
Faculteit Toegepaste Economische Wetenschappen
The journal of behavioral finance. -
16(2015):4, p. 297-310
University of Antwerp
Many investors hold structured products in their portfolio. The current paper develops a break-even analysis on how this presence of structured products can be understood based on cumulative prospect theory. The framework provides additional insights into the behavioral conditions and required return expectations that make investors buy into expensive structured products with uncertain rewards. We make the strong assumption that the structured product has a zero prospect value when considered as a stand-alone investment. Still the optimized portfolio typically includes structured products. The degree of probability distortion determines the entry of structured products in the optimal portfolio. Once included it is the curvature of the value function that guides the actual weight of structured products and the potential increase in portfolio prospect value. Structured products receive a higher weight and increase the portfolio prospect value more if the investor is less conservative.