Abstract

Portfolio insurance is a hedging technique that allows the maximum exposure to high return assets while providing reasonable assurance that a prespecified minimum return will be achieved. While it is true that the chaotic market conditions of October 19th made portfolio insurance more costly than normal, it still provided substantial protection. Portfolio insurance did not significantly contribute to the decline of stock prices on October 19th, rather the magnitude of the market fall was due to insufficient liquidity. Portfolio insurance and other dynamic strategies continue to have a legitimate role to play in helping investors realize their objectives.