The CPPI guy with 130% cushion had a lower or higher return than the first person? I put lower because of his cushion requirement he held less equities right?
as far as I remember CPPI underperforms buy-and-hold when the market is relatively flat and volatile…
Yeah, that was the second part of the question. CPPI definitely underperforms in volatile market.
tenbagger Wrote: ------------------------------------------------------- > The CPPI guy with 130% cushion had a lower or > higher return than the first person? I put lower > because of his cushion requirement he held less > equities right? it’s lower, but not for that reason. It’s lower because he sells equities when they go down only to see them go back up ( in a flat but volatile market), and vice versa when market goes up, he buys more only to see them come back down.
The first part: Buy-and-hold sells about $34000 worth and the CPPI will buy about $38000 or so.
yeah mo34 is right! i also added that too.
So are you guys saying that the return of buy and hold investor was higher than that of the CPPI investor?
the return was not the only story here. you had to get the total value of the portfolio after the market move, and calculate the new investment in stocks (1.3 * cushion) for CPPI and what you need to sell for the buy-and-hold.
no reverse… buy and hold is do nothing strategy, but CPPI allocates more to equities when the market is up and vice versa. So you’ll end up with more equity allocation before the market drops…so CPPI doesn’t go well with mean reversion
At the beginning stage, CPPI allocated more to equities as equity allocation would be 130% (Portfolio Value - Floor Value) and floor was 1,000,000 i guess. Hence 1,300,000 were allocated to stock whereas 1,200,000 were allocated to stock in the first part. So CPPI grew more as there was 8% return on equities. Correct me if I’m wrong.
unikorn Wrote: ------------------------------------------------------- > At the beginning stage, CPPI allocated more to > equities as equity allocation would be 130% > (Portfolio Value - Floor Value) and floor was > 1,000,000 i guess. Hence 1,300,000 were allocated > to stock whereas 1,200,000 were allocated to stock > in the first part. So CPPI grew more as there was > 8% return on equities. > > Correct me if I’m wrong. don’t both start with 1200000 and 800000 irrespective of their allocation strategy?
flyingkolours Wrote: ------------------------------------------------------- > unikorn Wrote: > -------------------------------------------------- > ----- > > At the beginning stage, CPPI allocated more to > > equities as equity allocation would be 130% > > (Portfolio Value - Floor Value) and floor was > > 1,000,000 i guess. Hence 1,300,000 were > allocated > > to stock whereas 1,200,000 were allocated to > stock > > in the first part. So CPPI grew more as there > was > > 8% return on equities. > > > > Correct me if I’m wrong. > > don’t both start with 1200000 and 800000 > irrespective of their allocation strategy? no, CPPI had to buy an extra $100,000
ahahah Wrote: ------------------------------------------------------- > flyingkolours Wrote: > -------------------------------------------------- > ----- > > unikorn Wrote: > > > -------------------------------------------------- > > > ----- > > > At the beginning stage, CPPI allocated more > to > > > equities as equity allocation would be 130% > > > (Portfolio Value - Floor Value) and floor was > > > 1,000,000 i guess. Hence 1,300,000 were > > allocated > > > to stock whereas 1,200,000 were allocated to > > stock > > > in the first part. So CPPI grew more as there > > was > > > 8% return on equities. > > > > > > Correct me if I’m wrong. > > > > don’t both start with 1200000 and 800000 > > irrespective of their allocation strategy? > > > no, CPPI had to buy an extra $100,000 def incorrect. I remember mo numbers 34 and 38
on previous exams you could clearly see they accepted both ways. Multiplicative and addition. I mean that would suck so much that just because i use multiplication i got the whole question wrong even though all my other calcs were right
uh… this is not difficult to set out exactly. One has 2m with CPPI and 130%, so 1.3*(2,000,000 - 1,000,000)=1.3m That grows at 8%… so 1,404,000. Apply 1.3*(2,104,000-1,000,000) and you get 1,435,200. Thus, the guy needs to buy 1,435,200-1,404,000=31,200. So he buys 31,200. Constant mix has 1.2mn in equities. That grows at 8%, so 1,296,000. Total portfolio is worth 2,096,000. So, he needs to own 60%*2096000 =1257600. Thus, he needs to sell 38,400. What’s wrong with that?!
Etienne - i got the same results as well.
I thought they had two strategies - buy and Hold and CPPI. Why constant mix ?? Buy and Hold - do nothing CPPI - Buy 31,200
I think Buy and Hold was the first part of the question, but then the second with Grace and some other person was based on CPPI and constant mix. Can anyone confirm or reject?!
i vaguely remember…the cal were required for CM and CPPI. the comparison was between CPPI and B/H. I distinctly remember we has to circle either buy/sell…and that;s relevant only for CM and CPPI.
Ethienne, I second what you said. And I also second your numbers, they were the right answers 