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- 2013-9-26
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Carl Allen, CFA, has been assigned the task of documenting some of his company’s asset allocation techniques. After the firm receives accolades in a recent trade magazine article highlighting firms with innovative trading strategies, Allen’s supervisor decides it is time the firm began formally documenting how properly timed allocation shifts can add value to assets under management. Allen decides he will not only document the firm’s specific allocation adjustment strategies, but will also compile a document listing various allocation techniques. Allen decides to begin with input factors such as investor risk tolerance and market conditions and work his way to specific techniques designed to take advantage of various opportunities. His overall plan is to work from theoretical concepts to specific applications. One of the first concepts Allen has to explain is the idea of holding an “optimal” portfolio. In his mind, Allen decides he has to adequately explain the two main factors that will allow an investor the ability to hold an optimal portfolio. Which of the following will dictate the selection of an investor’s optimal portfolio? A)
| The tangential intersection between an investor's indifference curve and the efficient frontier. |
| B)
| The global minimum variance portfolio. |
| C)
| Any intersection between an investor's indifference curve and the investment opportunity set. |
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An optimal portfolio is any set of assets that maximizes an investor’s utility, which is dictated by his indifference curve, with those assets yielding the highest returns at given risk levels, which are dictated by the efficient frontier. The tangential intersection of indifference curves with the efficient frontier dictates an investor’s optimal portfolio.
Allen has determined there are differential postures an asset manager can take, depending upon whether market conditions are trending up, trending down, or staying relatively level with significant volatility. Which rebalancing strategy provides the greatest benefit when markets are trending up or down with little oscillation? A)
| Constant mix strategy. |
| B)
| Buy and hold strategy. |
| C)
| Constant proportion portfolio insurance strategy. |
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When a market is either trending up or down with few oscillations, a constant proportion portfolio insurance (CPPI) strategy will outperform other strategies. A CPPI strategy will provide increasing exposure to risky assets when asset values are increasing. An investor will essentially hold an increasing amount of risky assets when their value is increasing. On the other hand, in markets with a declining trend, investors following a CPPI strategy will be selling risky assets faster than others when markets are declining.
While conducting his research, Allen determines that some dynamic strategies can use a mathematical formula that can easily determine the amount of assets one invests in equities. Specifically, one formula Allen discovers is: $ Invested in stock = m x (assets – floor)
where:
m | =
stock investment multiplier | assets | =
total assets held in the portfolio (TA) | floor | =
the minimum allowable portfolio value (F) (zero risk level) | assets - floor | =
cushion or funds that can be put at risk |
Realizing that his firm’s trading strategies were highlighted in the recent edition of a trade magazine due in part to some timely exposure increases in trending markets, Allen begins to document how his firm applies this particular mathematical formula. Since Allen’s firm’s performance seems exemplary in a trending market, which value of “m” was probably chosen?
The implication is that Allen’s firm made some important choices in a trending market. This indicates a constant proportion portfolio insurance (CPPI) allocation strategy, which requires that an “m” greater than 1 be chosen. Apparently, Allen’s firm was able to increase exposure to equities quickly enough to take advantage of a trending market and probably was able to decrease exposures quickly enough before markets may have trended downward. |
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发表于 2012-3-24 13:21
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