CPPI, not constant mix, assumes risk tolerance is directly related to wealth. A constant mix strategy assumes that risk tolerance is constant regardless of wealth levels.

In a trending market, CPPI outperforms a comparable buy and hold, which, in turn, outperforms a constant mix strategy.

In a flat but oscillating market, constant mix outperforms a comparable buy and hold strategy, which, in turn, outperforms a CPPI strategy.

Constant mix strategies underperform when there are no reversals and outperform when there are up-down oscillations.

CPPI is the term used by Perold and Sharpe. It is referred to as insured asset allocation and momentum based by Maginn and Tuttle. CPPI is a momentum based strategy that aggressively increases exposure to risky assets in a rising market.

Constant proportion is a convex strategy.

With a constant mix strategy, stocks must be sold as the market rises in order to maintain the ratio of stock to total assets.

To maintain the constant mix, when stock prices rise, stocks must be sold.

Constant mix is a concave strategy while buy and hold is a linear strategy.

The initial portfolio consists of $2.5 million in cash plus $7.5 million in stock. The initial stock-to-total value ratio can be expressed as 7.5/(2.5 + 7.5) = 0.75. After the increase in the value of the stock component of the portfolio, the stock-to-total value ratio is 8.0/(2.5 + 8.0) = 0.7619. The amount of stock that must be sold to lower this ratio to 0.75 is determined as follows:

(8.0 − X)/(10.5) = 0.75, or X = $125,000

(8.0 − X)/(10.5) = 0.75, or X = $125,000

Portfolio C has the most invested in equity and alternative investments such as the hedge fund and the least invested in bonds thus it is most suited to someone who can tolerate more risk such as Kent who is only 26 years old. Since Lerner is the oldest at 70 years old and still owns the copper mine he would not benefit from the private equity or real estate investments in portfolio B. Also, private equity could have a long lock up period which would not be appropriate for an older person. Since portfolio B has a higher concentration of long term bonds than portfolio A, portfolio B is more interest rate sensitive making it less appropriate than portfolio A for Lerner. Johnson on the other hand is younger than Lerner and can therefore tolerate the longer lock up period of the private equity in portfolio B and greater interest rate sensitivity of the higher concentration of long term bonds in portfolio B.

Portfolio C has the most invested in equity and alternative investments such as the hedge fund and the least invested in bonds thus it is most suited to someone who can tolerate more risk such as Kent who is only 26 years old. Since Lerner is the oldest at 70 years old and still owns the copper mine he would not benefit from the private equity or real estate investments in portfolio B. Also, private equity could have a long lock up period which would not be appropriate for an older person. Since portfolio B has a higher concentration of long term bonds than portfolio A, portfolio B is more interest rate sensitive making it less appropriate than portfolio A for Lerner. Johnson on the other hand is younger than Lerner and can therefore tolerate the longer lock up period of the private equity in portfolio B and greater interest rate sensitivity of the higher concentration of long term bonds in portfolio B.

To calculate the targeted stock holding, multiply the stock multiplier by (total assets portfolio floor).
Total assets = $93,000.
Portfolio floor = $70,000.
Stock multiplier = 2.

The new stock holdings = 2 × ($93,000 - $70,000) = $46,000.
Current stock holdings are $57,350, so we must sell $11,350 in stocks to hit the target, which means that the bond holdings will rise by $11,350.

To calculate the targeted stock holding, multiply the stock multiplier by (total assets portfolio floor).
Total assets = $93,000.
Portfolio floor = $70,000.
Stock multiplier = 2.

The new stock holdings = 2 × ($93,000 - $70,000) = $46,000.
Current stock holdings are $57,350, so we must sell $11,350 in stocks to hit the target, which means that the bond holdings will rise by $11,350.

Traders who make moves for the purchase of reallocating assets or dealing with liquidity issues are called passive or liquidity-oriented traders. Liquidity-oriented traders are more concerned with time than price, because they are willing to pay for liquidity when they need it. Wallace is price-sensitive rather than time-sensitive, which classifies him as a passive trader.

The portfolio does contain a fair amount of income-producing bonds, and the diversification of the portfolio could suggest some interest in limiting volatility and the effect of market downturns. But the presence of real estate and private equity in the portfolio suggest the owner is not concerned about liquidity.

A constant-mix strategy outperforms in a flat but oscillating market but underperforms in a trending market. A constant-proportion strategy outperforms in a trending market but underperforms in a flat but oscillating market. Buy and hold limits downside by keeping funds in cash or bonds, while it performs well in an upward-trending market and is roughly flat in an oscillating market. If Nack doesnt have any insight on where the market is going and wants to limit loss of principal, buy and hold is the best option of those offered, especially considering that her analysts are projecting either a flat or upward market, but not a downward market. Program trading is not a rebalancing strategy.

At the time of the second rebalancing, the portfolios stock weighting is 68.11%. Constant-mix rebalancing assumes the purchase or sale of stock sufficient to return the portfolio to its original weighting, in this case 65%.

68.11% − 65% = 3.11%

68.11% − 65% = 3.11%