Which of the following strategies is most appropriate for an investor whose risk tolerance drops to zero when the value of the portfolio drops below a floor value? A) Constant proportion portfolio insurance, BUT NOT Buy and hold. B) Constant proportion portfolio insurance AND Buy and hold C) Buy and hold, BUT NOT Constant proportion portfolio insurance D) Constant mix ONLY. (added an extra answer choice for good measure)

b

A

A

buy and hold will never below floor value

B

B but really cuz of what goodman21 said…i need to sit near him during the exam

B buy and hold m=1 … floor = risk free

Guys look at the formula’s of the 3 strategies! CPPI $ dollars in stock = M (TA - F) M = stock investment multipler TA = Total Assets F = FLOOR value. If the TA = F… you cannot have anymore in stock so its all in the risk free.

B

D D D

A. – It’s amazing that I can’t see a graph in the curriculum for this topic. Buy and Hold: The implication of using this strategy is that the investor’s risk tolerance is positively related to wealth and stock market returns. Risk tolerance is zero if the value of stocks declines to zero. (P97) 1, Is this risk tolerance the ability to take risk? 2, Is a buy-and-hold investor’s willingness to take risk constant, and independent of the changing market?

B , because floor value occurs in b-and-h and CPPI but not in concave strategies which don;t need it

D

Oops, I meant A

deriv108 Wrote: ------------------------------------------------------- > A. > > – It’s amazing that I can’t see a graph in the > curriculum for this topic. > > Buy and Hold: The implication of using this > strategy is that the investor’s risk tolerance is > positively related to wealth and stock market > returns. Risk tolerance is zero if the value of > stocks declines to zero. (P97) > > 1, Is this risk tolerance the ability to take > risk? > > 2, Is a buy-and-hold investor’s willingness to > take risk constant, and independent of the > changing market? B&H: the trick is that your initial investment is diversified between risk-free asset = floor value, and the rest to risky asset at the beginning, once risky asset drops to zero, your portoflio consist only of risk-free asset = ok for zero risk tolerance

Soccertom9 Wrote: ------------------------------------------------------- > Guys look at the formula’s of the 3 strategies! > > CPPI $ dollars in stock = M (TA - F) > > M = stock investment multipler > TA = Total Assets > F = FLOOR value. > > If the TA = F… you cannot have anymore in > stock so its all in the risk free. ^ best explanation i’ve read so far. you guys ready for the answer?

answer please…B

goodman2011 Wrote: ------------------------------------------------------- > buy and hold will never below floor value Agreed…Buy and hold strategy never shorts a stock.

forzajuve Wrote: ------------------------------------------------------- > Which of the following strategies is most > appropriate for an investor whose risk tolerance > drops to zero when the value of the portfolio > drops below a floor value? > > A) Constant proportion portfolio insurance, BUT > NOT Buy and hold. > > B) Constant proportion portfolio insurance AND Buy > and hold > > C) Buy and hold, BUT NOT Constant proportion > portfolio insurance > > D) Constant mix ONLY. > > (added an extra answer choice for good measure) ACCORDING TO SCHWESER: (B) In each of these strategies, risk tolerance is zero when the value of assets drops below the floor. Under buy and hold, the floor value is the original amount invested in T-bills.