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

A) downward oscillating market.

B) upward oscillating market.

C) flat but oscillating market.

D) never.

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Answer and Explanation

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

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Which of the following statements regarding the risk consequences of asset allocation strategies is FALSE?

A) Constant proportion portfolio insurance (CPPI) actively assumes risk tolerance is directly related to wealth.

B) Constant mix actively assumes risk tolerance is directly related to wealth.

C) Buy and hold passively assumes risk tolerance is directly related to wealth.

D) With a buy and hold strategy, the investor's tolerance for risk is zero if the value of the investor's assets falls below the floor value.

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Answer and Explanation

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.

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In a trending market, which asset allocation strategy outperforms?

A) Constant proportion portfolio insurance (CPPI).

B) Buy and hold.

C) Constant mix.

D) Cannot be determined.

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Answer and Explanation

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