Reading 42: Monitoring and Rebalancing －LOS i among

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 15: Monitoring and Rebalancing
Reading 42: Monitoring and Rebalancing
LOS i: Distinguish among linear, concave, and convex rebalancing strategies.

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Which of the following statements about convex and concave strategies is FALSE?

A) No downside protection exists for constant mix strategies.

B) The constant mix payoff curve is concave.

C) For constant proportion portfolio insurance (CPPI) strategies, the payoff curve is concave.

D) The constant mix performs much like a covered call position.

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Answer and Explanation

For CPPI strategies, the payoff curve is convex. The other statements are true.

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A constant mix strategy:

A) represents the purchase of portfolio insurance.

B) performs poorly in flat, oscillating markets.

C) performs much like a covered call position.

D) exhibits good upside potential.

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Answer and Explanation

Constant mix performs best in flat, oscillating markets, much like a covered call strategy. CPPI represents the purchase of portfolio insurance. Constant mix has weak upside potential in that the strategy reduces exposure to risky assets in an increasing market.

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A constant proportion portfolio insurance (CPPI) strategy:

A) represents the sale of portfolio insurance.

B) represents the purchase of portfolio insurance.

C) performs well in flat, oscillating markets.

D) exhibits weak upside potential.

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Answer and Explanation

CPPI represents the purchase of portfolio insurance. Constant mix performs best in flat, oscillating markets. Constant mix has weak upside potential in that the strategy reduces exposure to risky assets in an increasing market.

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Which of the following statements concerning dynamic strategies for asset allocation is FALSE?

A) Constant mix sells stocks as they fall and buys stocks as they rise.

B) Constant proportion portfolio insurance sells stocks as they fall and buys stocks as they rise.

C) Buy and hold is a linear strategy.

D) A constant mix strategy is a concave strategy.

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Answer and Explanation

A constant mix asset allocation strategy buys stocks as they fall and sells stocks as they rise. All of the other statements given are true.

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Which of the following statements about asset allocation strategies is FALSE?

A) The constant proportion portfolio insurance (CPPI) strategy is a convex strategy.

B) The constant mix strategy gives rise to a concave payoff diagram.

C) Strategies for which the slope of the exposure diagram is greater than one give rise to concave payoff diagrams.

D) The constant proportion portfolio insurance (CPPI) strategy has a payoff diagram similar to that of a protective put.

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Answer and Explanation

An exposure diagram for an asset allocation strategy plots the desired stock position (y-axis) against the value of the portfolio (x-axis). Strategies with concave payoff diagrams (y-axis = portfolio value, x-axis = stock market value), such as the constant mix strategy, have exposure diagrams with slopes between zero and one.

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Which of the following statements regarding asset allocation decisions is FALSE?

A) Tactical asset allocation is a contrarian investment strategy where expected returns tend to fall when prices rise.

B) Insured asset allocation is similar to a constant mix-type asset allocation strategy.

C) A strategic asset allocation needs to be rebalanced periodically to maintain the constant asset proportions.

D) A tactical asset allocation strategy is designed to take advantage of perceived inefficiencies in the asset markets.

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Answer and Explanation

An insured asset allocation is similar to a constant proportion portfolio insurance strategy.

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Which of the following statements regarding asset allocation decisions is FALSE?

A) Tactical asset allocation is a contrarian investment strategy where expected returns tend to fall when prices rise.

B) A strategic asset allocation needs to be rebalanced periodically to maintain the constant asset proportions.

C) Insured asset allocation is similar to a constant mix-type asset allocation strategy.

D) A tactical asset allocation strategy is designed to take advantage of perceived inefficiencies in the asset markets.

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Answer and Explanation

An insured asset allocation is similar to a constant proportion portfolio insurance strategy.

deqiang

thanks.