M is the constant proportion of the cushion invested in equities. Higher the M - a more amount of your cushion will be invested in equities. So can I say that a higher M indicates a higher tolerance to risk or a greater need for return?
M > 1 means CPPI rebalancing. This method is consistent with an investor who exhibits increasing risk tolerance as wealth increases. I don’t believe the text mentions a greater need for return, however, the CPPI strategy will outperform buy & hold and constant mix strategys during non-volatile, trending markets (either up or down).
Remember: M ( Portfolio Value - Floor).
M = 1 is Buy and Hold. Just buy and hold. Thats it. Linear strategy. Works well in Trending markets. Lowest Cost. Your risk tolerance and market returns have a linear relationship.
M < 1 is Constant Mix (Concave strategy, hence M is less than 1). Works well in volatile markets. Contrarian strategy. Two constant mix strategies: Calendar Rebalancing (not tied to the market, just rebalances on specific calendar days) and Percent-of-Portfolio (IS tied to the market and allows for greater control - applies up/down widths to monitor risk). As the market moves, you keep rebalancing to the original SAA.
M > 1 is CPPI. Convex strategy, hence M is > 1. As the market increases/decreases, you change your SAA accordingly. If market rallies, you buy more, if market gets crushed, you sell.