Assignment Question -
Suppose you are a portfolio manager. You are managing a $5 million portfolio with equity and bond. You are using constant proportion portfolio insurance (CPPI) strategy to manage your portfolio and you are evaluating whether you should switch to constant mix strategy now when the market is highly volatile.
The following is the information of your existing portfolio:
|
Proportion
|
Name of the instrument
|
Price ($)
|
Quantity
|
|
Stock
|
Stock A
|
100
|
10,000
|
|
Stock B
|
200
|
5,000
|
|
Stock C
|
500
|
2,000
|
|
Bond
|
Bond D
|
1.000
|
2,000
|
Assume you have decided to implement constant proportion strategy within the equity proportion.
a) What are the difference between constant proportion portfolio insurance (CPPI) strategy and constant mix strategy?
b) Based on the above existing portfolio information: suppose the investment policy have specified a floor value of $4 million. What is your portfolio multiplier?
c) What is the target asset allocation of the above portfolio if you adopt a constant mix strategy assuming the above allocation is the target allocation you would like to maintain?
d) Suppose each of the stock in your portfolio decrease by 20% and the bond in your portfolio increases 15% after 3 months. How many shares of Stock A, B and C do you have to buy or sell if you want to maintain your investment in equity proportion according to your answer in part b) with a floor value of $4 million? Round down your answer to the nearest whole figure.
e) Suppose each of the stock in your portfolio decrease by 20% and the bond in your portfolio increases 15% after 3 months. How many shares of Stock A, B and C do you have to buy or sell if you want to maintain your target asset allocation according to your answer in part c)? Round down your answer to the nearest whole figure.
f) After 3 months, all the stocks in your portfolio increase by 15% and the bond price decreases by 10%. Identify and explain which strategy will generate a higher return.