40h, 40i and 40j (Level 3) – How much do I really need to know?

Question

I have just been taking notes on the last 3 LOSs of Reading 40, which involve comparing Constant-mix, Buy-and-hold, and CPPI strategies.

My current level of understanding can best be approximated as: "These are a bit like the bowls of porridge in 'Goldy Locks and the Three Bears', one is too hot, one is too cold, and the other is just right... or something like that. I get that they have different payoffs in different market conditions."

Also, there is a little Angel Marc on my left shoulder saying: "If we dig in and really try to understand the curriculum, we could develop a proper understanding of the this subject and even understand those deceptively-simple-looking-but-infuriating equations."

Finally, there is a little Devil Marc on my right shoulder saying (whilst rolling his eyes): "For Christ sake, Marc. You've finished this reading, move the $%^& on. If this does show up on the exam (which it won't) you know enough to get by. So move on or, better yet, let's start drinking."

I've got to say, Devil Marc sounds pretty convincing - especially that part about drinking.

Advice?

sankrutimehta · Answer

@Marc: I have observed the concept in quite a few papers. So consequently I did end up knowing the concepts well

Sophie Macon · Answer

@marc - I think I'm tending towards Devil Marc here. If you want to finish with revision and move on with practice papers, this is the one to note down as "I-haven't-completely-got-it-yet" and return to it later when you have time in between pockets of trying the practice exams.

I say this cos you are probably gonna bump into it in an item set practice question and you'll learn about it anyway then.

Well you're right in the Goldilocks analogy here. Buy-and-hold is probably the middle ground. The key thing to remember is the shape of the curve of the other 2 (one concave and one convex, as question may refer to it like that without explicitly mentioning CM or CPPI). The easy way for me to remember this is that CM is the one that buys low and sells high (the one the "makes sense", from a memory perspective), and therefore will perform well in a flat and oscillating market.

CPPI  is just then the 'opposite'.

I guess summary is, it's not a difficult concept to grasp once you tried a few practice questions, so I wouldn't fret about trying to understand it completely now, as you are likely to come across it in practice papers later. Plus, drinking sounds tempting!