a conceptual question on CPPI, where the target investment in stocks is given as
Target investment in stocks = m × (Portfolio value – Floor value), subject to m>1 If the portfolio value is 100, floor 10, m = 2 -> my target allocation to stocks is equal to 180 - i.e. more than the portfolio value. Does this make sense - am I expected to leverage the portfolio in order to have the target exposure?
i think thats true. Before that can i confirm if we have the constraint m is bigger than 1 by definition of CPPI? OR you assume it only here? Reflecting that if floor is 0 and m is smaller than 1 it is the same to the constant mix. There i dont see we assume the case of m is bigger than 1 in Schweser but if we do, it results in the leverage