CPPI cushion

Can someone please explain why these are different: With CPPI, target equities investment = M(portfolio value – floor value).

With buy and hold, why is target equities investment = portfolio value – cash value?

With constant mix target equities investment = M(portfolio value - floor value of 0).

for CPPI M>1

for CM M<1

for BH M=1

  1. For buy and hold, why is floor value = cash value?

  2. For constant mix, why is floor value = 0?

  1. Floor value equals cash value because cash is assumed to be risk free and hence the portfolio value can never fall below that. 2. Constant mix always wants to be invested in equities regardless of portfolio value…it’s like that be definition really.

Completed that for you.

What exactly does floor value mean? And since for CM M<1, how do equities increase, when you are always multiplying by a number less than 1?

The floor value is essentially your stop loss. You will stay invested in equities and cash until the entire portfolio hits the floor value. Once it does you only hold cash.

If, say, M = 0.6, then equity = 0.6(portfolio value − 0) = 0.6(portfolio value). Your portfolio is 60% equity, 40% cash.

Good point. Floor value is stop loss.

Bear in mind only Buy-and-hold’s cash value = floor value.

same with CPPI though yeah?.. The floor is cash or risk free assets…?

^i think only Buy and hold.

In CPPI you sell equities when they drop in price, whilst ur selling equities ur buying risk free. CPPI also has a floor.

^ agree, but floor not equal to cash or risk-free bond.

yes it is

the shape of CPPI is a convex curve with the interception on y-axis (cash value) above 0

the shape of CM is a concave curve with the interception at 0

the shape of the B&H is a straight line with the interception on the y-axis (cash value) above 0

Seem to forgeting some basic concepts last minute. For B&H the cash value is constant and for CPPI it keeps changing right?

yes. As long as there is no return on the cash.