CM Vs. CPPI rebalancing stretegy

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derswap07

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Mock exam: Schwesers 2013 Q 5 Part C
Q: Given downward trending market which stretegy will outperform:
Answer: A buy and hold strategy (B/H) would probably have outperformed a constant proportion portfolio insurance (CPPI) strategy, but a concave strategy would have outperformed a convex strategy during the year.
I thought that in trending market, CPPI outperforms. ??!!
 
that is incorrect, CPPI / convex strategy does outperform in trending market
 
S2000magician wrote:
It may depend on their relative floor values; did you have any information on that?
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also true! so ya mock X book X would help give you an answer.
 
no it depends on valatility. if volatility is high then a buy and hold strategy outperforms a convex cppi strategy even if the market is trending because when prices are up you buy when down you sell so if its volatile you are still buying at a high price and selling at a low price. cppi outperforms if the market is trending but no volatile
 
I wrote it on the first line -Schwesers 2013 Q 5 Part C
 
derswap07 wrote:
I wrote it on the first line -Schwesers 2013 Q 5 Part C
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ok I dont know what exam this is. I only have book 1 exam 1 2 3 and book 2 exam 1 2 3
 
I understand it as trending implies more than one period of up or down market performance. The convex strategy sells on losses and buys wins. So CPPI would be selling equities on losses into the fall, limiting the losses. Constant mix would be buying since the equity percentage is declining and fixed income increasing. Buy and hold would do nothing. Maybe there is more to the question but this is how I would interpret trending.
 
Interesting with regards to volatility and Buy & Hold. I will check this.
Basic guidelines (assuming they don’t talk about volatility)
CPPI outperforms in upward trending
Constant Mix in mean reverting
Buy and Hold will generally be somewhere in between the two.
 
There is sometimes a distinction made between “trending with low volatility” and “trending with volatility.” The degree of volatility will determine whether CPPI or buy-and-hold (BH) will be superior.
In trending with low volatility, the best strategy according to the text is: CPPI > BH > CM.
In a market with no trending and high volatility, it’s: CM > BH > CPPI.
BH is always in the middle.
So if there is a trending market with a substantial degree of volatility, a case can be made that BH will outperform CPPI, because CPPI will end up buying high and selling low as the volatility occurs.
 
Yeah I saw it on last years morning section. Basically, if you get one of these questions the answer is buy and hold.
However, they said they accepted CPPI as well in this instance because of the argument that you can make for it.
Basically, with the CPPI if the volatility is enough that you are unloading your position at inopportune times than the buy and hold strategy might be better. But unless they give you specific information on the movement of prices and rebalancing rules I don’t think you need to worry.
 
The Righteous Hacksaw wrote:
Yeah I saw it on last years morning section. Basically, if you get one of these questions the answer is buy and hold.
However, they said they accepted CPPI as well in this instance because of the argument that you can make for it.
Basically, with the CPPI if the volatility is enough that you are unloading your position at inopportune times than the buy and hold strategy might be better. But unless they give you specific information on the movement of prices and rebalancing rules I don’t think you need to worry.
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Last years morning paper the correct answer was CPPI but they also accepted buy and hold. They clearly outlined everything for CPPI, the upward trending market, the specific portfolio floor value as well as accepting additional risk as the value of the portfolio increases. Still not sure why they accepted Buy and Hold but I guess they felt it was vague
 
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