There is one question where they said it doesnt want market value of portfolio to decline more than 20% below its current market value.

Risk(ability and willingness) higher

outlook is buulish in growth assets and volatility will be below historical average

Answer is CPPI but they said specific floor value of 20% below current market value can be set with initial allocation of less than 20% to risk free…please explain this

Is it because you buy risk free assets when market goes down and hence you can establish higher floor value when market goes down??

which question is it?

BH your floor is the initial risk-free asset allocation - if risky asset goes to 0 you keep risk-free asset

CM your floor can go down to 0 if you keep rebalancing every time risky asset falls

CPPI - you have your cushion, once you lose the cushion your risk tolerance goes to zero.

Equity investment = M (portfolio value - floor value)

M = cushion

M > 1.0 for CPPI

The reasoning is that under CPPI you reduce your exposure to risky asset as the value decreases (convex structure), so every time risky asset drops you rebalance- sell risky asset and add to your risk-free allocation - so your initial floor has to be less than 20% so that you get to that 20% when you can’t sell any more of the risky asset.

Hope this makes sense!

yes thank you