R30 BB9 - CPPI, Buy and Hold, CM

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June06

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Jonathan Hansen, 25 years old, has a risk tolerance that increases by 20 percent for each 20 percent increase in wealth. He wants to remain invested in equities at all times.
Q: What strategy (CPPI, buy and hold…) is suitable?
Invested in equities at all time signal what information? Please advise, tks!
 
Jonathan Hansen, 25 years old, has a risk tolerance that increases by 20 percent for each 20 percent increase in wealth. He wants to remain invested in equities at all times.
Q: What strategy (CPPI, buy and hold…) is suitable?
Invested in equities at all time signal what information? Please advise, tks!
 
This one is tricky. How pure equities mandate pick rebalance strategy…
 
I guess buy and hold Strategy. Because the shape of portfolio curve is linear to equity % change. ( straight line)
 
Unfortunately not Buy and hold….based on BB answer.
 
Buy and hold does not invest in equities at all times. If the value of equities falls to zero, it will not rebalance. Answer should be CPPI. His risk tolerance increases proportionately with wealth
 
The key here is to understand his utility function is convex, meaning his utility is increasing at an increasing rate with the level of wealth.
The only strategy which matches is CPPI
 
We all WRONG.
BB:
Given his proportional risk tolerance (constant relative risk tolerance) and desire to remain invested in equities at all times, a constant-mix strategy is appropriate for Hansen.
 
June06 wrote:
We all WRONG.
BB:
Given his proportional risk tolerance (constant relative risk tolerance) and desire to remain invested in equities at all times, a constant-mix strategy is appropriate for Hansen.
Click to expand...
the question seems incorrect. In constant mix, the risk tolerance remains same all the time. In this q it increases with increase in wealth.
 
it is a linear increase -> 20% increase in wealth = 20% increase in equities. so Constant mix. (relative risk tolerance is linear).
constant mix also has Investment in stocks = m * Portfolio value (m a constant).
 
Have portfolio of 100M, 50M in equities, 50M in bonds. Use constant mix methodology.
Wealth increases by 20% to 120M
Equities increase by 10M to 60M, bonds to 60M, total = 120M
Equities have increased from 50M to 60M. 60/50-1 = 0.2 = 20%
 
^ how about 100% equity portfolio as the example?
 
cpk123 wrote:
it is a linear increase -> 20% increase in wealth = 20% increase in equities. so Constant mix. (relative risk tolerance is linear).
constant mix also has Investment in stocks = m * Portfolio value (m a constant).
Click to expand...
0<m<1 : constant mix => target stock proportion
1: Buy and hold => target stock proportion = actual stock proportion
>1 : CPPI =>??
 
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