in buy and hold , floor value is fixed to your holding of risk free asset . There is no probabilty value will below the floor. In the book CFAI say risk tolerance to 0 when stock decline to 0 . So I think schweser is wrong
D
goodman2011 Wrote: ------------------------------------------------------- > in buy and hold , floor value is fixed to your > holding of risk free asset . There is no > probabilty value will below the floor. In the book > CFAI say risk tolerance to 0 when stock decline to > 0 . So I think schweser is wrong The question asked which are appropriate- if they invest their floor value in the risk free asset, then buy and hold is an appropriate strategy because it guarantees them the floor value. It may not be as appropriate as CPPI in certain cases, but it still does the job.
whose risk tolerance drops to zero when the value of the portfolio drops below a floor value? in buy and hold , it will never drop below floor value ,so it is a wrong question
the question is perfectly fine. you have some longs you buy and and a risk free asset. if your longs go to zero, you are left with your risk free asset. your floor is that level. at that level you have zero risk. definitely B for the win. I hope this whole friggin’ test is on CPPI vs buy to hold vs constant mix. i think it’s the only thing that makes sense to me.
goodman2011 Wrote: ------------------------------------------------------- > whose risk tolerance drops to zero when the value > of the portfolio drops below a floor value? > > in buy and hold , it will never drop below floor > value ,so it is a wrong question The investors risk tolerance, not the portfolio’s. The investor essentially wants a guarantee that they will have at least the floor value at the end of the time period, which buy and hold offers. The fact that the portfolio will never drop below the floor value, as you suggest, is why buy and hold is appropriate.
B