A CPPI portfolio has a floor value of $4 million, a market value of $. million, and a multiplier of 1.5. If stocks increase by 20% and bonds increase by 12%, rebalancing requires O buying $900,000 in stocks and selling $900,000 in bonds O buying $900,000 in bonds and selling $900,000 in stocks O buying $1,200,000 in stocks and selling $1,200,000 in bonds O no action because a CPPI portfolio is passively managed
A CPPI portfolio has a floor value of $4 million, a market value of $. million, and a multiplier of 1.5. If stocks increase by 20% and bonds increase by 12%, rebalancing requires O buying $900,000 in stocks and selling $900,000 in bonds O buying $900,000 in bonds and selling $900,000 in stocks O buying $1,200,000 in stocks and selling $1,200,000 in bonds O no action because a CPPI portfolio is passively managed
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:### Portfolio Rebalance Question on CPPI Strategy
A CPPI (Constant Proportion Portfolio Insurance) portfolio has a floor value of $4 million, a market value of $7 million, and a multiplier of 1.5. When employing this investment strategy, it's important to adjust asset allocations in response to market movements to ensure the portfolio's value remains above its floor value while maximizing potential growth.
### Scenario Details:
- **Floor Value:** $4 million
- **Market Value:** $7 million
- **Multiplier:** 1.5
### Market Changes:
- **Stocks increase by 20%**
- **Bonds increase by 12%**
### Rebalancing Recommendations:
Given the changes in the market:
- **Option 1: Buy $900,000 in stocks and sell $900,000 in bonds**
- **Option 2: Buy $900,000 in bonds and sell $900,000 in stocks**
- **Option 3: Buy $1,200,000 in stocks and sell $1,200,000 in bonds**
- **Option 4: No action because a CPPI portfolio is passively managed**
In the context of a CPPI strategy, these options explore different rebalancing actions to take in response to fluctuations in the stock and bond markets. Remember, the chosen action should align with the goal of maintaining the floor value while leveraging the multiplier to capitalize on market upswings.
**Note:** CPPI strategies typically involve active rebalancing, so the correct answer must reflect this principle.
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