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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

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, with a floor value of $50 and a multiplier of 1.2.

Suppose stocks increase by $30 in period 1 and further increases by 10% 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

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