clearlycanadian

Assume that $10 million of stocks and cash is being managed according to a constant mix strategy. Assume further that the desired stock-to-total portfolio value ratio for the strategy is 0.75. Which of the following is closest to the amount of stock that must be bought or sold if the value of the stock component of the portfolio increases by $500,000?

A) $125,000 must be sold.

B) $500,000 must purchased.

C) $500,000 must be sold.

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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

clearlycanadian

Which of the following statements about constant mix rebalancing is least accurate?

A) As stock prices fall, the stock to total assets ratio decreases, so stocks must be purchased.

B) As stock prices rise, the stock to total assets ratio increases, so stocks should be purchased.

C) As stock prices rise, the stock to total assets ratio increases, so stocks should be sold.

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

clearlycanadian

Which of the following statements about constant proportion rebalancing strategies is least accurate?

A) The strategy does well in a bull market.

B) The strategy is protected on the downside.

C) It is a concave strategy.

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Constant proportion is a convex strategy.

clearlycanadian

A constant mix strategy will outperform a buy and hold strategy in a(n):

A) upward oscillating market.

B) flat but oscillating market.

C) downward oscillating market.

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

clearlycanadian

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

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

B) The constant mix payoff curve is concave.

C) No downside protection exists for constant mix strategies.

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

clearlycanadian

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

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) A constant mix strategy is a concave strategy.

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

clearlycanadian

Which of the following statements regarding asset allocation decisions is least accurate?

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

B) A contrarian investment strategy is one where expected returns tend to fall when prices rise.

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

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

clearlycanadian

A constant mix strategy:

A) performs much like a covered call position.

B) performs poorly in flat, oscillating markets.

C) exhibits good upside potential.

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

optiix

Which of the following statements about asset allocation strategies is least accurate?

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

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

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

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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.

optiix

A constant proportion portfolio insurance (CPPI) strategy:

A) performs well in flat, oscillating markets.

B) represents the purchase of portfolio insurance.

C) represents the sale of portfolio insurance.

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CPPI represents the purchase of portfolio insurance. Constant mix performs best in flat, oscillating markets.