Hi all. I am using Schweser Notes and on Page 47 Book 5 it’s stated that “The M selected must be greater than 1.0 and does not change once selected, in order to produce CPPI strategy.”

Please could anyone tell me why?

Thank you.

Hi all. I am using Schweser Notes and on Page 47 Book 5 it’s stated that “The M selected must be greater than 1.0 and does not change once selected, in order to produce CPPI strategy.”

Please could anyone tell me why?

Thank you.

If M>1, then when stock prices increase you buy more and more of them. So the rate of increase of stocks in your portfolio is >1. If, on the other hand, stock prices go down, you sell them at an increasing rate (>1). This produces a convex payoff diagram. I believe that M can actually change, provided it still will be higher than one (I think this is what they meant). M is selected by investor’s risk and return preferences so, intuitively it has every right to change.

When M<1, in constant mix strategy, then the diagram in convex, and you basically adjust the portfolio to target weights when stock prices change (sell when increased and buy when decreased). In buy-and-hold M=1 as you do not change your initial alliocation at all.

hi kobi. I know when M<1 and the floor value is zero this becomes a constant mix. but when the floor value is not zero, is it still a constant mix? that’s the confusing point i can’t figure out.

It is important to remember with these relationships that the constant mix is selling to the cppi when stocks are increasing due to stocks overweighting the M portion of his portfolio and he will be buying from the cppi when stocks are decreasing in value as they will make up a smaller portion on his M portion. They way I understand it this is a closed market so one buy/sell strategy has to counter the other.

Yes it is still constant mix, hence the first C in CPPI.