Can someone please help explaining the Constant-Proportion Strategy Insurance (CPPI)? According CFAI page 98: Target investment in stock = m*(Portfolio value - Floor value) where m>1 Now, if portfolio value = 100, floor value = 20 and m=2, one should hold 160 in stocks which is more than the portfolio value of 100 which does not make sense to me. What am I missing here?

I think you need to buy 60 more… your final value needs to be 160

For CPPI, value of cash is NOT equal to Floor Value unless the cushion is zero. Floor Value is a hypothetical portfolio value for which the investor must not lose. I was confused by this for a while because the buy-hold strategy’s floor value IS equal to cash. What is even more confusing is that for a constant-mix strategy, floor value is actually equal to zero.

R Cash Wrote: ------------------------------------------------------- > Can someone please help explaining the > Constant-Proportion Strategy Insurance (CPPI)? > According CFAI page 98: > Target investment in stock = m*(Portfolio value - > Floor value) where m>1 > Now, if portfolio value = 100, floor value = 20 > and m=2, one should hold 160 in stocks which is > more than the portfolio value of 100 which does > not make sense to me. What am I missing here? Actually in this strategy, you never have a floor value less than 80% of the portfolio value. That percentage is usually between 80-90%. If you have a floor value less than that percentage, it defeats the purpose of this strategy itself. I mean, you are quite risk friendly (or rich :)) to tolerate a floor value of 20%.

Thanks guys, this is very helpful! ‘value of cash is NOT equal to Floor Value’ is the missing link in my head. If the floor value is 70 in my example, it means I don’t have to hold this in cash, hence I have a target of 60 (2*(100-70)) in stock and 40 in cash. When stock market declines and value of portfolio equals floor value then allocation to stock = 2*(70-70) = 0. Indeed, makes perfect sense. ‘Actually in this strategy, you never have a floor value less than 80% of the portfolio value’: the example makes indeed sense if I increase the floor value to say 80. But why can’t it go lower than 80%? It’s possible to deduct algebraically a lower limit. If I choose a floor value as % of the total portfolio of a, then the amount of stock is always less than the portfolio value: m*(p-a*p)

1-1/m. So, in my example with m=2, a>0.5 and the floor value has to be larger than 50 to make sense. Is the 80%-90% based on what’s typically applied in practice?

R Cash Wrote: ------------------------------------------------------- > Thanks guys, this is very helpful! > > ‘Actually in this strategy, you never have a floor > value less than 80% of the portfolio value’: the > example makes indeed sense if I increase the floor > value to say 80. But why can’t it go lower than > 80%? It’s possible to deduct algebraically a > lower limit. If I choose a floor value as % of the > total portfolio of a, then the amount of stock is > always less than the portfolio value: > m*(p-a*p)1-1/m. > So, in my example with m=2, a>0.5 and the floor > value has to be larger than 50 to make sense. Is > the 80%-90% based on what’s typically applied in > practice? Yes the 80-90% is what’s typically applied in practice. And yes, the stock amount would have to be less than the portfolio value because this strategy, although not mentioned in CFA books, does not allow short selling or borrowing. And as I mentioned, rationally you wouldn’t want your portfolio value to suffer losses greater than 20%.

What SS# is this from?

dtrynoski Wrote: ------------------------------------------------------- > What SS# is this from? Its in LOS 45h,i,j

In a flat but oscillating market which one outperforms the other between the buy and hold and CPPI and why?

buy and hold from memory outperfroms both the constant mix and the CPPI in a oscillating market

for what it’s worth…These strategies seem to always be tested at L3.

cppi outperforms in an momentum based market…since u buy more as prices rise and u sell as prices fall

pimpineasy Wrote: ------------------------------------------------------- > buy and hold from memory outperfroms both the > constant mix and the CPPI in a oscillating market Performance in a oscillating market : constant mix > B&H > CPPI

AMA - Agreed CFAI, Volume 6, Reading 45, p.100

AMA Wrote: ------------------------------------------------------- > pimpineasy Wrote: > -------------------------------------------------- > ----- > > buy and hold from memory outperfroms both the > > constant mix and the CPPI in a oscillating > market > > Performance in a oscillating market : constant mix > > B&H > CPPI phuck i need to look this over…thankks for the correction