Could you please explain when would one use a buy-and-hold strategy, constant mix strategy, and constant-proportion portfolio insurance (CPPI)… this topic just doesn’t want to stick in my mind… thanks!!
CPPI - in uptrending market Constant Mix - in flat but oscillating market Buy and Hold will outperform constant mix in uptrending market and outperform CPPI in flat but oscillating market.
Does “buy-and-hold” ever outperform CPPI in uptrending market?
well depends on the floor value
So why is it in the example, CPPI is the answer? I guess I am just not understanding these strategies entirely… In a buy-and-hold strategy you can specify the floor (which in this case is 1.25M of 2M)… oh I see… she does not want to invest in risk-free securities… she wants all of it in equities… but still, I am not fully grasping the idea of CPPI…
I think I am slowly getting there =) Buy-and-hold is the same as CPPI, but only fixed… CPPI keeps rebalancing (buy more when uptrend, sell more when downtrend)… this way, we will keep our floor at its minimum… 1.25M… … I need to dwell on it a bit more… but thank you cfaboston28 for your inputs.
buy and hold and CPPI both put floor to the investment but CPPI does better than Buy to hold in uptrending market hence CPPI is the answer. Don’t think too much…
Isnt it an ethics violation to be giving out info. on the 2010 exams? I didn’t know it was out in the public…
where can i get cfa exam 2010 questions? in general, because of cppi’s convexity, it will outperform b&h on both ends, but will lose in the middle, as long as the multiplier is greater than 1
Pls. mail me the CFA 2010 questions. If I don’t pass after knowing the questions, I don’t think I will ever sign up for it agian.
Sorry guys, I meant to say 2009 =)
Boris, what do you mean on both ends? are you referring to the price structure of the underlying?
yall k. refer to note 5 page 59. i use the 2 charts to remember the relationship. they sum up the relationship between underlying price (x) and port value (y). if use b&h as benchmark, cppi wins on both end with underlying up or down big. cm will win for the middle part. kurmanal Wrote: ------------------------------------------------------- > Boris, what do you mean on both ends? are you > referring to the price structure of the > underlying?
always remember - B&H is middle of the road between CPPI and CP in all situations…
So let me try to summarize… When market is not trending, but reverting on every up or down move, then CM is the best strategy, as it is contrarian to the whole market - sell when the price goes up, and buy when it goes down… it will do terribly if the market keeps going up or keeps going down… as it will buy more and more and the market keeps declining… (which in the long run should work, if the prices eventually revert back - right?) now for buy-and-hold and CPPI: use either of these strategies when the market is trending up as both of these will outperform CM… The reason CPPI underperforms BH when there are small trending up moves (or down moves) is due to high transaction costs, I assume… CPPI would do better if the market just keeps going up and up, as it keeps buying the securities… at the end, when the market reverts, it has more securities to sell than BH… right? -bad_orange, i am not quite getting why we should always remember that BH is in the middle between CPPI and CM? thanks for all your inputs…