Main Question: What’s does Buy and Hold outperform (B6 R40 Exhibit 9, pg 100)?
And…for Bonus marks:
Define or provide an equation, where m is referred to consistently accross all three…
The text book uses a two asset case…and says…
Port Value = Investment in Stocks + Investments in Bonds. Ok.
Target Investment in Stocks = m x Portfolio Value. Ok.
…but couldn’t you re-arrange the Constant mix equation to read:
Port Value = (1/m) x Target in Stocks.
…and so, if m = 1, for buy-and-hold, then…
Port Value = (1/1) x Target in Stocks…or in other words…100% stocks for Buy-And-Hold???
Where is my logic broken?
I have a guess, that m is actually a coefficient, or exponent, in a differential equation, or integral of some kind, that CFA is approximating with 3 linear equations. They explain the three concepts, graphically, only with some _ very comical footnotes _ on page 99 of book 6. TL;DR CFA Textbook confusion and ambiguity is rampant while explaining Rebalancing Strategies. No benchmark is referenced. M is inconsistently referenced. Graphics are replaced with comical footnotes.
buy and hold never outperforms both, it is always ranked #2
markets trending up/down:
buy and hold
markets volatile and flat:
constant mix (best)
buy and hold
Down up = Cst Mix outperfm.
Down Down = CPPI / Buy Hold better than Cst Mix
I guess that’s what schweser says, correct me if im wrong…
@MCAP11, Exhibit 9, R40, says otherwise.
However, I should have been more clear:
In an up or down market, what does Buy and Hold Outperform?
to put it another way… what’s the benchmark used to measure outperformance?
each other ? just compare C-M against B-A-H against C-P-P-I under different conditions such as flat and oscillating , trending .
match it against the risk tolerance of the individual.
The appropriateness of buy-and-hold, constant-mix, and constant- proportion portfolio insurance strategies for an investor depends on the investors risk tolerance, the types of risk with which she is concerned (e.g., floor values or downside risk), and asset-class return expectations
Larger Risk tolerance as given in IPS or the words in the vignette signify a desire to hold stocks in larger and increasing proportions as wealth increases ,and the individual also buys more insurance in the form of larger allocation to cash as stocks and hence wealth reduces . So it is quite a dynamic strategy
Lower risk tolerance implies the need to keep a larger cushion is cash as stocks and hence wealth increases , which is a contrarian strategy ( i.e. bucking the trend) . This is best met by the constant mix strategy.
A buy and hold strategy would be suitable for middle-of-the-road risk , neither taking too much risk nor too litlle . Good when markets go straight up or straight down. The upside is limited because of the drag of holding cash , but the downside is limited because you have a cash base which never erodes.
@janakisri if it’s truley “each other”, than two out of 3 can’t “outperform”. Two people can’t win the same race.
Exhibit 9 on page 100 of Reading 40 must be in error.
Also…I googled Perold and Sharpe’s work from 1988. I have to conclude the CFA material is simply, really, really poorly written. I think CFA is attempting to helter us from a little math, and graphical explanations, which would have greatly helped.
The graphics are here:
Also, CFAI writes:
“The multiplier refers to Equation 3 which integrates all the models discussed” - pg 100 of Book 6.
But they forget to mention that Equation 3 only works for Constant mix, if you set the Floor = 0.
Thanks everybody who replied…
There is a question in topic test about which characteristics are in line with client’s preferred buy and hold strategy.
The answers is : Manager anticipates strongly positive equity performance for the next few years. Perold-Sharpe analysis clearly illustrates that a buy-and-hold strategy can be expected to outperform a rebalancing discipline in an upward trending market.
The cppi rebalancing strategy can outperform buy and hold in outward trend, so it is a poorly worded answer.
Sometimes people read too much into things that are a complete waste of time. It’s a rather simple concept and the math doesn’t matter. Just know the basics and move on. Look up their research on 6/4.