about “Constant mix strategy”; Schweser says; If stocks continue to decline, more and more cash is used to purchase stocks. At the extreme, the very last dollar in the portfolio consists of the ESTABLISHED PROPORTIONS OF DEBT AND EQUITY(i.e., effectively the portfolio goes to zero). i can’t understand then meaning of “ESTABLISHED PROPORTIONS OF DEBT AND EQUITY”… anyone help me… thanks.
Well, assume your established proportions of debt and equity are 60% equity and 40% debt. Those are your desired proportions at any time. If stocks fall, they won’t represent 60% of your portfolio. They will represent less because bonds did not change in value. You will now have 56$ of equity for a total of 96$ portfolio and your proportions are altered. You will then rebalance right? Now imagine the stocks continue to fall. As this is happening you are selling bonds and buying stocks to keep the same 60%, 40% established proportions. Ultimately, if you portfolio is now woth 2$ it means you have 1.2 $ in stocks and 0.8 in bonds. AT the extreme, the more your portfolio fall the more you buy stocks and your portfolio will converge toward close to zero. Established means the desired initial proportion
thank you CFALEB!! i can understand.
CFALEB Wrote: ------------------------------------------------------- > Well, assume your established proportions of debt > and equity are 60% equity and 40% debt. Those are > your desired proportions at any time. If stocks > fall, they won’t represent 60% of your portfolio. > They will represent less because bonds did not > change in value. You will now have 56$ of equity > for a total of 96$ portfolio and your proportions > are altered. You will then rebalance right? > > Now imagine the stocks continue to fall. As this > is happening you are selling bonds and buying > stocks to keep the same 60%, 40% established > proportions. Ultimately, if you portfolio is now > woth 2$ it means you have 1.2 $ in stocks and 0.8 > in bonds. AT the extreme, the more your portfolio > fall the more you buy stocks and your portfolio > will converge toward close to zero. Established > means the desired initial proportion great explanation …to add a little ketchup this leads to market stabilty (less vol) as u buy stocks during falling stock prices and sell during rising stock prices…oppositie of CPPI where u sell during stock prices fallin and buy during stock rising