CCPI is driving me nuts

CFA Level III
#1

I’m having a tough time w. CCPI and it shouldn’t be this difficult!! If I have a $2 MM total portfolio, a $1 MM floor and 130% cushion, how much do i put in stock?

#2

(2-1)(1.3) = 1.3MM

#3

but what about the floor of $1mm? do i just ignore it then?

#4

2mm - 1mm = 1mm x 1.3 = 1.3 invested, keep 700k in cash.

#5

If asset value is 1MM it becomes 1-1 * 1.3 = 0 stocks.

#6

so then the floor is just a what… algebraic construct? doesn’t mean an ACTUAL cash floor? plus, think through what happens as my portfolio value begins to fall. say, my new portfolio value is $1.3 MM, same $1M floor, same 1.3 cushion: i end up w. (1.3 - 1) x 1.3 = .39 M in stock, and .91 M in cash so i now have MORE cash in the portfolio, even tho i have a smaller total portfolio? that makes sense to you? as my portfolio value declines in absolute dollar terms, the dollar value of my floor… increases?

#7

o its the ASSET value floor? geezus. this whole time i thought “floor” meant cash portion, not overall portfolio thanks, guys!

#8

zoya Wrote: ------------------------------------------------------- > so then the floor is just a what… algebraic > construct? doesn’t mean an ACTUAL cash floor? > > plus, think through what happens as my portfolio > value begins to fall. > > say, my new portfolio value is $1.3 MM, same $1M > floor, same 1.3 cushion: > i end up w. (1.3 - 1) x 1.3 = .39 M in stock, and > .91 M in cash > > so i now have MORE cash in the portfolio, even tho > i have a smaller total portfolio? that makes sense > to you? > > as my portfolio value declines in absolute dollar > terms, the dollar value of my floor… increases? This makes sense, you are getting closer to the point of having no stocks and no risk to the floor value.

#9

thanks, paraguay, v. helpful as always.

#10

The floor is on total portfolio value NOT on cash in the portfolio. In your example where the portfolio value falls to 1.3m, you do need to reduce your stock position and increase cash. That is the essence of CPPI.

#11

yeah i can’t believe this whole time i thought floor = bonds makes me worried what ELSE i similarly misunderstand… sigh