I had asked CFAI to check its solution to problem 7A(iii) of Reading 42. Here is what I got from them today: *********************** from Wanda Lauziere to * cc CFA Institute Customer Service date Thu, May 8, 2008 at 3:35 PM subject RE: Error? mailed-by cfainstitute.org Thank you for your inquiry. You are correct, and we appreciate your bringing this to our attention. We will delete the phrase “and the value of that floor …money market funds)” when the curriculum is reprinted. Thank you again for taking the time to inform us of this error. Regards, Wanda Lauziere CFA Institute ********************************* The following is my email to CFAI that resulted in the above response: ********************************* from * to info@cfainstitute.org date Sat, May 3, 2008 at 7:25 PM subject Error? mailed-by gmail.com Reading 42 problem 7A (iii): The solution states: “The constant-proportion portfolio insurance strategy (CPPI) maintains an exposure to equities that is constant multiple greater than 1 of a “cushion” specified by the investor. The investor sets a floor value below which he does not wish assets to fall, and the value of that floor is then invested in in some nonfluctuating assets…” I am wondering if there is an error above. More specifically, in the part “and the value of that floor is then invested in in some nonfluctuating assets.” The investment in non-fluctuating assets is not equal to the floor value because if it was, the investor would not be able to invest in a multiple m >1 of the cushion, as given for CPPI by: Target equity allocation = m X (Portfolio value - Floor value) Say we start with $100 to invest and desire a floor value of $40 and m =1.2. Target equity allocation = 1.2 X($100 - $40) = $72. So we have $100-$72 = $28 to invest in the non-risky asset. You CANNOT have $40 to invest in T-bills. Conversely, if you did invest $40 in T-bills, you cannot satisfy achieve the target equity allocation because you don’t have enough money to do so. Can someone please look into this and generate an errata if my understanding is correct? Thanks, * L3 CFA candidate
Automatic Pass for paying that much attention to an answer 
They just put you on the fast track… Good find though
Yeah, I have been obsessing about CPPI - there is something fishy about how the text talks about floor. As if that was not enough , volkovv gave birth to a second floor…
he had twins!
good job CFAAtlanta, glad to know that our combined reasoning was correct
In my world, if you want to invest in $72 worth of stock you need < $10 in cash.
That would be some nice leverage Joey…
All hedge funds have leverage like that. Everyone has leverage like that.
Well not all leverage +7x as you know. Well maybe mainy of the Stat/Vol Arb and other RV funds do but not your typical equity hedge fund :).