2016 AM Mock exam - question 5C

I’m reading the answer provided by the cfai, but honestly I don’t know how they are coming to their conclusion that a buy and hold strategy is the most appropriate strategy for Milton in a flat oscillating market? Wouldn’t miltons portfolio value increase thus increase his willingness to take risk? Is the answer saying that his risk is straight up constant and earning a higher return than buy/hold so it’s not the best choice?

He willing to invest a higher proportion of his wealth in risky assets as his portfolio value increases. This is consistent with both Buy and Hold and CPPI, but inconsistent with Constant Mix, so that is out. Constant Mix maintains a constant proportion to risky assets. So between the remaining two, which is appropriate for a flat but oscillating market? Buy and Hold. CPPI would underperform in an oscillating market, as it would be selling on declines, then upon reversals buying on increases, selling low and buying high as market prices move in a range.

I guess isn’t his portfolios value increasing as he is buying and selling assets in an oscillating market? I.e buy low sell high. Its just that his level of risk is staying constant? So if I had to rank Risk Tolerance for these three strategies.

Constant Mix - Constant level of riskiness.

Buy-Hold - Linear level of risk

CPPI - Higher level of risk because you are buying more of the riskier asset.as the market increases in value

CPPI might not be higher level of risk strategy related to BH. BH is just passively related with wealth level and CPPI is actively related to wealth level. BH is always better in flat but oscillating market related to CPPI. BH is always less costly. One or more those features would be mentioned in case to help you to choose better solution,

Makes perfect sense thanks

You’re welcome.

flat but oscillating market: constant mix > b&h > cppi

trending markets: cppi > b&h > constant mix

Yep, but almost always in each case this is only 1 of 2 or more criterion for choice.