Portfolio Rebalancing: CPPI and Constant Mix

@RaviVooda agreed, I think it is the dynamic element that lends us to think about it as a form of insurance. As I said above, I think it is quite a clumsy analogy, but you never know if you might get some multiple question like “which of the three strategies described by John Smith could also be considered as portfolio insurance?”!!

@RaviVooda off the top of my head I think this is where the linear pattern of buy and hold vs curved pattern of CPPI comes into affect – amount of cash you hold changes with CPPI, so you will only end up with the floor value in cash, say, £40, when equity falls to £0, whereas at higher values and returns you may be holding no cash at all. As I say, this is not something I would claim to fully understand, but it’s useful to have the discussion.

@RaviVooda I don’t think this one is very intuitve at all personally – and the description of the respective concave and convex strategies is not very helpful. Right or wrong, I just try to remember that CPPI is buying insurance because of the floor value which provides downside risk protection, i.e. it may be forced to sell all shares in a bear market, whereas the Constant Mix will have to buy shares as the market moves down – perhaps in that way, buying the shares that a CPPI strategy is selling, it might be seen as the provider of insurance. Let me know if that makes any sense to you!

I should probably disclaimer this by pointing out I am not very good at portfolio management, or historically I have not performed well in exams at PM!