This is incredibly annoying. I got this wrong and said constant mix when the right answer is buy and hold. This makes no sense to me. In the real world you’d pick the investment strategy with the highest return for the least amount of risk. Even though the client’s risk tolerance is higher, why would you pick the riskier investment strategy that will underperform? Frustrating because this part of the material I feel like I know very well and the right answer wouldn’t apply to the real world IMO.
I’m confused as well. in flat but oscillating markets, constant mix should outperform buy and hold because winners are sold before they go down and losers are bought before they go up, right?
Oscillating market constant mix performs best. You sell winners prior to the market correcting downward (lowering your exposure to the decline) and you buy lower valued stocks prior to the market correcting upwards (increasing your exposure to the appreciation).
Buy and hold might be better if the investor has very low risk tolerance that is capped (i.e. they want to have reserve funds in the form of the original cash portion of the injection). Constant mix technically could fall to zero value if the markets continuously trended downwards and you kept selling low and buying high.
I haven’t looked at the question but that’s my general take. If it’s about performance, the constant mix is the better way to go. If the investor is very risk averse and wants to maintain a certain threshold of wealth (in the form of cash) it might not matter about the market movements and might matter more about putting them in a portfolio that fits those needs. Buy and hold has less downside.
Think of the payoff charts. Constant mix is concave. Buy and hold is linear that is limited to the initial cash investment. CPPI is convex but still has downside protection in the minimum portfolio value.
Read the vignette. It specifies that the strategy has to be consistent with Milton’s risk tolerance. Constant mix isn’t.