Jscott24 Wrote: ------------------------------------------------------- > ^nope - she said in an “uptrending” market she > wanted to reduce cash - with CPPI you buy more > stock and sell cash instruments to do so in an > uptrending market. This would minimize JScott. I thought she wanted to keep her risk free assets at a fixed 1.25 million and never have to add any more to risk free assets, or take any out of them. And she wanted to take advantage of trending markets. that leaves only buy-and-hold i think. Could I have read the problem wrong…very feasible… the US 7171 version.
either way taking advantage of trending markets means CPPI > buy-and-hold I think the question stated minimize cash investments and not “add any more”
CPPI was the correct answer.
CPPI another no brainer - this exam seemed ridiculously easy
In a flat but oscillating market, the correct answer would be buy and hold. Reason is as follows: Buy and hold means she will have 60% in risk free securities irrespective of what the market does. The equity return portion of the portfolio will be flat overall (assuming markets oscillate and stay flat) Constant % means if the market falls, she will need to sell risk free securities (her primary objective is to keep 60% risk free to support her living expenses) to rebalance into equities. CPPI - while this strategy means she also has a safety net in the form of her risk free assets, in an oscillating market, she will be making losses on the equity portion, hence inferior to buy and hold.
bdu Wrote: ------------------------------------------------------- > In a flat but oscillating market, the correct > answer would be buy and hold. Reason is as > follows: > > Buy and hold means she will have 60% in risk free > securities irrespective of what the market does. > The equity return portion of the portfolio will be > flat overall (assuming markets oscillate and stay > flat) > > Constant % means if the market falls, she will > need to sell risk free securities (her primary > objective is to keep 60% risk free to support her > living expenses) to rebalance into equities. > > CPPI - while this strategy means she also has a > safety net in the form of her risk free assets, in > an oscillating market, she will be making losses > on the equity portion, hence inferior to buy and > hold. Your definitions are all correct, but in the question on the U.S. exam the market was trending (or that was the prediction of future conditions) not flat but oscillating.
yeah, i was addressing the version of the exam that had flat/oscillating…in a uptrending market, CPPI would be the answer
assuming an up-down movement, wouldnt a buy and hold result in a decrease in the risk free securities proportion in the first move before coming back up to 60%?
anomaly Wrote: ------------------------------------------------------- > assuming an up-down movement, wouldnt a buy and > hold result in a decrease in the risk free > securities proportion in the first move before > coming back up to 60%? Yes, that is why BDU is wrong. The only way to maintain a CONSTANT mix is by using the CONSTANT mix strategy in an oscillating market. Why do you think its called CONSTANT mix ppl…lol. Say you have 100 bucks. you start out 60 bonds 40 equity. Equity goes up to 60. Now your mix is 50/50 not 60/40 as before. With buy and hold your mix changes. And Constant mix would outperform the buy and hold because you buy low sell high, reaping profits along the way, even if the end out come is flat. BDU definitions are correct, but has a critical flaw that will get all make all your answers wrong. He got %s and absolute values mixed up. Sure the granny will have 60 bucks in fixed income irrespective of what equity market does. But that % will change as the total portfolio value changes. BTW this is for the asia exam.
I sat the exam in Australia, and there was no requirement for her to hold a constant % of assets in fixed income. My interpretation was only the original portion of the fixed income investment be preserved for her living requirements (primary objective) True, in oscillating market, the constant mix strat outperforms buy and hold, however if the market were to fall in a sustained fashion, the constant mix strat means she could theoretically end up with nothing…which violates the primary objective. Besides, the “oscillating market but remaining flat” was the “view” of her investment advisor which may or may not come true. In this instance i think the primary objective should supersede all others.
bdu Wrote: ------------------------------------------------------- > I sat the exam in Australia, and there was no > requirement for her to hold a constant % of assets > in fixed income. My interpretation was only the > original portion of the fixed income investment be > preserved for her living requirements (primary > objective) > > True, in oscillating market, the constant mix > strat outperforms buy and hold, however if the > market were to fall in a sustained fashion, the > constant mix strat means she could theoretically > end up with nothing…which violates the primary > objective. Besides, the “oscillating market but > remaining flat” was the “view” of her investment > advisor which may or may not come true. In this > instance i think the primary objective should > supersede all others. Agree with you… Remembered that retirement was her primary objective, thus constant mix not appropriate as her last $ is still in equity
BDU: yea I dont recall there being a fixed % requirement in there either. The question was which one outperforms in an oscillating market. The answer is constant mix. >Buy and hold means she will have 60% in risk free > securities irrespective of what the market does. This statement is flat out wrong. I dunno how that affects your score for the entire item set, but shows a fundemental flaw in your understanding of the 3 strategies. If you dont take the “view” of a flat but oscillating market as a given, then I don’t know how you can come to a conclusion about which one performs better. Moreover, I think you will have struggled for the entire test if you questioned every statement by applying the doomsday scenario such as what if equity markets crash to 0. Even when the person in an item set has doubts about his view, CFA will clearly state that he is unsure of his view. EX the guy who predicted that yield curve was upward sloping but he was unsure. So in this case, without further information you have to take the oscillating but flat as given.
constant mix in india as well 8080
The statement should be “buy and holds means she will have a floor value equal to 60% of its portfolio at inception, irrespective of what the market does.” It doesn’t have to be so extreme for the portfolio to drop to 60% of the original value, if you use constant mix. It depends on your frequency of rebalancing. Suppose the original FI/Equities mix of 60/40, stock prices down 50%, and you rebalance, you should have something like 48/32, and a further 63% decrease in the stock price would cause the value of portfolio fall short of 60% of the inception amount. Yeah this is still absurb because it means 82% decrease in total, however it is certainly not 100% decrease. What I want to point out is that constant mix doesnt give you a floor value. And I interpret the question as she needs to preserve 60% of the portfolio inception value. So buy and hold meets this goal, but not constant mix theorectically. I just think the question put this goal for a reason, and I dont think it is an overthought. The market expectation of flat oscilliating is just an expectation after all, but with that expectation you cant select CPPI since it will surely underperform buy and hold. Of course if the expectation comes true she would have been better off with constant mix. However, the whole argument that doesnt support constant mix is the first point, not the market expectation of a flat market. You can easily say that market expectation could go wrong. Different people may have different ideas, or interpretation, on a question or a sentence. The wordings are not as clear as you think, or at least some people think in that way. Don’t disrespect others’ opinions in a way saying the person would have struggled in the entire exam due to a tiny part in the exam. LongOnCFA Wrote: ------------------------------------------------------- > BDU: yea I dont recall there being a fixed % > requirement in there either. The question was > which one outperforms in an oscillating market. > The answer is constant mix. > > > >Buy and hold means she will have 60% in risk free > > > securities irrespective of what the market does. > > > This statement is flat out wrong. I dunno how that > affects your score for the entire item set, but > shows a fundemental flaw in your understanding of > the 3 strategies. > > If you dont take the “view” of a flat but > oscillating market as a given, then I don’t know > how you can come to a conclusion about which one > performs better. Moreover, I think you will have > struggled for the entire test if you questioned > every statement by applying the doomsday scenario > such as what if equity markets crash to 0. > > Even when the person in an item set has doubts > about his view, CFA will clearly state that he is > unsure of his view. EX the guy who predicted that > yield curve was upward sloping but he was unsure. > So in this case, without further information you > have to take the oscillating but flat as given.
Gobear you missed the point where Oscillating means that market is up and down, and that flat means it ends up relatively flat. Thus your scenario of down market and then further down is wrong. Even if the market drops 99% and i keep rebalancing, meaning I buy more when it is down, I will recover the amount because the market will END FLAT. It is a given. Anway, sorry if I hurt your feelings. I am not going to argue with both of you and BDU anymore. Typical example of http://www.analystforum.com/phorums/read.php?13,1008673 your total combined post count is less than 5.
That’s why i said different interpretation. Somebody interpret the flat market as an EXPECTATION, somebody interpret it as given. I just point out the rationale of choosing buy-n-hold behind. You didnt hurt me, i just think some of your sentences were unnecessary.
8181 - answer is buy&hold , i got that too!
not sure if you guys caught that, but oscillating is only for next 12 months, but you need to pick a strategy for the next 5 years… so constant mix is not right (if only for 1 yr, then constant mix is best choice, same part A)