CPPI

[overhedge]

Good evening,
a conceptual question on CPPI, where the target investment in stocks is given as
Target investment in stocks = m × (Portfolio value – Floor value), subject to m>1

If the portfolio value is 100, floor 10, m = 2 -> my target allocation to stocks is equal to 180 - i.e. more than the portfolio value. Does this make sense - am I expected to leverage the portfolio in order to have the target exposure?

 

[nick123]

i think thats true. Before that can i confirm if we have the constraint m is bigger than 1 by definition of CPPI? OR you assume it only here?
Reflecting that if floor is 0 and m is smaller than 1 it is the same to the constant mix. There i dont see we assume the case of m is bigger than 1 in Schweser but if we do, it results in the leverage

 

[S2000magician]

overhedge wrote:Good evening,
a conceptual question on CPPI, where the target investment in stocks is given as
Target investment in stocks = m × (Portfolio value – Floor value), subject to m>1

If the portfolio value is 100, floor 10, m = 2 -> my target allocation to stocks is equal to 180 - i.e. more than the portfolio value. Does this make sense - am I expected to leverage the portfolio in order to have the target exposure?

Yes.
Note that m = 2 is a huge value.