CFA CFA Level 3 Portfolio Rebalancing: CPPI and Constant Mix

Portfolio Rebalancing: CPPI and Constant Mix

  • This topic has 6 replies, 2 voices, and was last updated Sep-17 by Jwa.
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    • RaviVooda
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      Please help to explain why is CPPI considered as Buying insurance and Constant Mix as Selling insurance


      @sophie
      ,@zee,@marc,@jwa,@alta12

    • Jwa
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      @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!

    • RaviVooda
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      @jwa that helps. thank you. I too did find portfolio managment tough in level-2 and in level-3. Level-3, I am yet to complete evaluation and attribution. Need to see how it goes.

    • RaviVooda
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      @jwa, why cant we think Buy and Hold as also buying insurance? Because in this case also we have a floor value?

    • Jwa
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      @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
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      @jwa, I am thinking since in Buy and Hold, the floor value is constant, it may not be seen as insurance during downside. But in case of CPPI, the floor value dynamically changes and also during downfall due to its nature of strategy we get into debt/cash faster than remaining strategies there by preserving money. Probably that is why it is called buying insurance. In Buy and Hold we do not think of preserving money at all and let equity value go to zero, may be that is why it cannot be compared with insurance

    • Jwa
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      @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?”!!

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