CPPI vs Buy and Hold - Floor value

In both of these, does the floor value remain the same?

Only with Buy and Hold.

Both Buy and Hold and CPPI have floor values.

Mr. Smart, please don’t respond if you don’t know the answer. We’re all here trying to learn

The floor is fixed for each.

For whatever it’s worth, constant mix also has a fixed floor value; it happens to be zero, unfortunately.

That’s not what he asked.

The floor is not really fixed for CPPI, if we assume rebalancing (which is safe to assume).

I’m not sure if this is in the material.

I’m probably not as smart as you, but I think the floor is fixed with CPPI, it is the cushion that can change.

Just glided through the material to check, I believe they throw a hint that it does change, but it’s not important for the exam.

However, in practice, the floor most certianly changes, there are leverage bands you cannot cross, hence why there is frequent rebalancing to raise the floor, and in some cases, lower it, but only to the extent that it had been raised, usually, or upon fund policy.

In a buy-and-hold strategy, you usually set a protective floor, and invest passively without really doing anything, although the floor should in practice rise up as allocation in stocks breaches a certain point.

I’m specifically looking at the Live Schweser Mock Exam question 5 part B. Why is that Buy and Hold and not CPPI

What’s the question?

If it were fixed floor values, then it has been already answered.

Yeah I had the same question when I encountered a related problem in CFAI 2012 Past test, specifically, Q3 Part 3.

In the answer, they say that both Buy&Hold and CPPI have floor value. I am really not so sure, given the dynamic nature of CPPI.

Hypothetically, under CPPI, let’s say stocks were trending up you keep increasing your allocation to equities, inline with CPPI. What if the stocks than crashed - for the sake of argument to almost zero. Wouldn’t your overall portfolio value fall below the initial floor value?

Depends on your collateral for leverage, and how fast the market crumbles.

This is really outside the scope of the exam. Just remember that both Buy and Hold and CPPI have cushions on their portfolios, and that CPPI is more dynamically allocated, with an exponentially increased risk tolerance as wealth increases.

Assume floor values are fixed for the sake of the exam. But they will not test you on this, since it hasn’t been mentioned. Only know the payoff charts and which strategy outperforms in which type of enviroment.

The floor values are fixed for Buy and Hold and CPPI. For CPPI the rebalancing is going to be done by subtracting the floor value from the total portfolio value giving you your “cushion” and multiplying the cushion by the multiplier which is some percentage of the floor value greater than 1 to find your total desired equity allocation.

Fixed a few things for you.


No, subtract the floor value from the total portfolio value, why would you subtract the total portfolio value form the floor? The total portfolio is bigger than the floor. But i suppose the second statement is right, it’s a constant percentage of the cushion not the floor, thanks for that one i suppose.

Oh, my mistake, English isn’t my first language. Subtract the floor value from the total value.

You’re right.

Why is floor value fixed for CPPI? Isn’t it the proportion that is fixed rather than the floor value?

That is to say that when total portfolio value decreases, the floor value will change as well
exp if portfolio value of $100 decreased to $80 and if the proportion is 80%, flloor value would decrease from $80 to $64 (80% of the current portfolio value of $80), so in this sense the floor value is not in fact fixed right?