risk tolerance Comparison: B/H and Constant Mix

CFA Level III
#1

B/H: positively related to wealth CM: Varies proportionally with wealth So how different are they?

#2

you mean constant or CPPI?

#3

Constant mix.

#4

CPPI, you buy equities as the market goes up, constant mix you sell equities as the market goes up (and vice versa as long as the market value > floor)

#5

I got those two sentences from CFAI book. It is not about CPPI, but CM

#6

BH - passively related to wea;th levels (as wealth increases, % of equity increases) CM - relative risk tolerance constant but absolute risk tolerance increases with wealth. CPPI - risk tolerance actively related to wealth levels

#7

IMO: BH and CPPI are pretty straight forward. Tricky one is CM. Relative risk tolerance is constant rather not effected by stocks / wealth movements. When stocks go up you just sell to maintain your % value of stocks in overall portfolio. Increase in wealth doesn’t impacts your relative risk tolerance in anyway. You are just focused on maintaining the ratio of stocks to total portfolio (this what they generally do in rebalancing). Absolute risk tolerance increases because with increase in stock prices, absolute amount of stocks in overall portfolio increases (and not %).