1 Department of Economics and Business Economics, Aarhus BSS, Aarhus University2 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
Retail structured products regularly receive much criticism from financial experts but seem to remain popular with investors. This article considers a generic structured product: the principal-protected index-linked note (structured bond), which resembles a portfolio insurance contract. The purpose of the article is to provide possible explanations for the puzzle of why small retail investors hold structured bonds. The investment universe consists of a stock index, a risk-free bank account, and a structured bond containing an option written on another index. We apply expected utility maximization and consider different utility functions and trading strategies. Our results show that investors should include structured bonds in their optimal portfolio only if they cannot access the index underlying the option directly and only if the products then provide sufficient diversification to compensate for their costs.
Journal of Derivatives, 2012, Vol 19, Issue 4, p. 7-28