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Explain the differences in the portfolio performance

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Reference no: EM133154587

Question - Consider a portfolio with an initial value of $100 that is invested in stocks and bonds using one of the two rebalancing strategies:

-a constant-mix (CM) strategy that invests 60% of the portfolio in stocks

-a constant proportion portfolio insurance (CPPI) strategy that invests in stocks 120% of the difference between the portfolio and the floor value, assumed to be $50.

Suppose stocks increase by $30 in period 1 and further increases by 20% in period 2, while bonds have a 0% return for both periods.

(a) Calculate the stock, bond, and portfolio values under the CM and the CPPI strategies:

(i) at the beginning

(ii) at period 1, before rebalancing

(iii) at period 1, after rebalancing

(iv) at period 2

(b) Using your results from part (a), explain the differences in the portfolio performance under the rebalancing strategies.

Reference no: EM133154587

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