CM VS CPPI VS BH

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aks123

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Say the market is flat and oscillating and we have two scenarios:
1)If Client wants a floor then buy hold will be preferred.Since BH outperforms CPPI.
2)Does increasing risk tolerance with wealth indicates that you want more risky assets added to your portfolio in volatile trending market.
I think i have seen questions on similar concepts in schweser q bank.
 
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 in flat but oscillating market?
A)
Constant proportion portfolio insurance.
B)
Both of these responses are correct.
C)
Buy and hold.
 
I am just asking if my concepts are correct with respect to the points that i have made.
 
Buy and hold.
This assumes the floor value is fixed and non-zero.
 
Your imposed constraint of RT dropping to zero takes the CM out. In flat but oscillating conditions BH trumps CPPI.
However it’s worth noting that when market is oscillating CM trumps BH. The only way BH supersedes other two is when markets are just flat–not trending and/or oscillating/reversing.
 
In my oponion, in flat and oscalliting market, Constant mix performs well but if someone has constraint to remain invested in equities an cash all time, then Buy and hold will be preferred choice.
 
zhk wrote:Your imposed constraint of RT dropping to zero takes the CM out. In flat but oscillating conditions BH trumps CPPI. However it’s worth noting that when market is oscillating CM trumps BH. The only way BH supersedes other two is when markets are just flat–not trending and/or oscillating/reversing.
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Flat markets affect all three the same. Which is neutral.
 
In flat markets, CM and CPPI do particularly poor. In that case BH prevails–BB example 9 Elain Cash.
 
Just my thought…If market is flat and oscillating and this fact is known to the investor then by following buy and hold strategy he will actually allow the portfolio to go further out of balance and might earn negative. Since his risk tolerance is zero it’s best to follow a constant rebalancing method. CM will outperform all other method and commensurate with his risk tolerance. It should be neither CPPI nor B&H.
 
In Mean reverting Markets, (oscilating means it goes up and comes down and if goes down then comes back up)
1) Constant Mix strategy outperforms B&H and CPPI -
Under Constant Mix When the market goes up(down) we sell(buy) to rebalance, this creates a buy at low and sell at high kind of effect. In any Markets B&H does not buy/sellso in a flat environment, it outperforms CPPI only because CPPI Performs worse then it. (It Sells more when Market goes down and Buys when Market comes back up - Sell at low price and Buy at High price kinda effect)
In a pure static (Flat) market why should CM underperform B&H, since if market is constantly flat under CM also we won’t buy / sell. Just the same as B&H. Pure static markets realistically won’t exist, but even if they exist CM should equal B&H in such markets
 
The answer was B&H due to over average risk toerance and in flat high volatile markets B&H outperforms CPPI
 
calvinoh wrote:
The answer was B&H due to over average risk toerance and in flat high volatile markets B&H outperforms CPPI
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Why would an adviser intentionally pick a strategy that would not perform as well as CM. Isn’t he violating his fiduciary duty by doing that?
 
I can see where he could be thought of violating his fiduciary duty if he didn’t properly educate the client. If he does educate, and the client still wishes to impose the constraint for whatever his reasons, then there is no violation.
…Besides, I think we’re getting into overanalysis territory for this particular case.
 
MissCleo wrote:
calvinoh wrote:
The answer was B&H due to over average risk toerance and in flat high volatile markets B&H outperforms CPPI
Click to expand...
Why would an adviser intentionally pick a strategy that would not perform as well as CM. Isn’t he violating his fiduciary duty by doing that?
Click to expand...
B&H is literaly the best choice for that client. It outperforms CPPI in high volatility markets and constand mix is not appropriate because it increases proportionally with the clients wealth.The question stated that the client has above average risk tolerance that being said we automatically eliminate constant mix from choices because its suited for below average risk tolerance clients. I referring to the real question btw don`t get confused
 
calvinoh wrote:
MissCleo wrote:
calvinoh wrote:
The answer was B&H due to over average risk toerance and in flat high volatile markets B&H outperforms CPPI
Click to expand...
Why would an adviser intentionally pick a strategy that would not perform as well as CM. Isn’t he violating his fiduciary duty by doing that?
Click to expand...
B&H is literaly the best choice for that client. It outperforms CPPI in high volatility markets and constand mix is not appropriate because it increases proportionally with the clients wealth.The question stated that the client has above average risk tolerance that being said we automatically eliminate constant mix from choices because its suited for below average risk tolerance clients. I referring to the real question btw don`t get confused
Click to expand...
 
calvinoh wrote:
MissCleo wrote:
calvinoh wrote:
The answer was B&H due to over average risk toerance and in flat high volatile markets B&H outperforms CPPI
Click to expand...
Why would an adviser intentionally pick a strategy that would not perform as well as CM. Isn’t he violating his fiduciary duty by doing that?
Click to expand...
B&H is literaly the best choice for that client. It outperforms CPPI in high volatility markets and constand mix is not appropriate because it increases proportionally with the clients wealth.The question stated that the client has above average risk tolerance that being said we automatically eliminate constant mix from choices because its suited for below average risk tolerance clients. I referring to the real question btw don`t get confused
Click to expand...
So you’re saying that while buy and hold will have more risk, lower lower return, lower sharpe ratio, the adviser is mandated to put him in this option over CM? The only true constraint I could see here that should sway the adviser would be transaction costs, which obviously in that case you’d have to go buy and hold since there are none, vs. constantly rebalancing. At this point I’ve conceded I’ve lost these points on the test, but am just genuinely curious.
 
ok so you are saying he should have went with the constant mix strategy even though he wants to be invested in stocks more than proportionally with his level of wealth? by the way floor value doesn`t exist in CM and I think he had a floor value as well didn`t he?
 
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