10B 2009 morning (easy CPPI problem)

CFA Level III
#1

The problem is easy, I just wanted to verify one thing:

The two reasons it gives for CPPI are

1.) it dynamically provides a floor alue consistent with Kilpatrick’s objectives

2.)When equities are trending up, CPPI will buy equities, constant mix will sell equities, and buy-and-hold will make no transactions. The greater investment in equities with CPPI allows Kilpatrick to minimize exposure to risk-free securities in rising equity markets, consistent with her objectives.

I basically said the same thing #2 did, and also added that the trending market would result in CPPI outperforming due to buying on rises and selling on declines. I didn’t say the floor value thing because I thought buy and hold did that too (just not dynamically) but the question didn’t say Kilpatrick mandated the floor be dynamic. Isn’t the 1st answer inapporpriate in this case? (yes i know i’m overthinking it, but it’s a valid point IMO)

#2

B&H is a special case of CPPI (multiplier=1). I wrote setting floor=$1.25m, but I didn’t say it’s dynamically provide a floor.

#3

That doesn’t answer my question but thanks for the comment nonetheless.

I am saying that the response by CFAI of it providing a “floor value” is inadequate because B&H does that as well.

#4

It provides 3 choices: B&H, CM and CPPI 1) the floor will exclude CM. Valid for CPPI and B&H. 2) the trending up is good CPPI 3) minimizing alloc to risk-free securities during rising market is to choose CPPI.

I got your point. 2 and 3 are merged into one, but I think yours is better.

#5

Yah thats basically what I mean, that point 2 and 3 should be separate points, and point 1 should be out since it doesn’t exclude B&H. had they specified “dynamic” then it would be all good.

#6

So you think you would get full points by mentioning

  1. portfolio insurance - $1.25MM

2)CPPI outperforms other strategies in markets trending upwards?