Let's consider an investor who wants to invest $100 worth in a CPPI product which consists of risky assets of value E and safe (riskless) assets of value B. The investor also decides to set the risky assets multiplier m=3 based on his analysis and he doesn't want to lose more than 80% of his initial investment i.e. go below 80%.

1. How much is invested in the risky versus safe asset at the initial date t=0?
2. Let us further assume that the risky asset value increases by 1/6=16.6666...% between t=0 and t=1 while the safe asset does not change in value. What is the CPPI allocation to risky and safe assets at date t=1?
3. Is the CPPI strategy pro-cyclical (recommends to buy the risky asset after an up move) or anti-cyclical (requires to sell the risky asset after an up-move)? Can you see any potential problem if a mast majority of investors start following a CPPI-type strategy? Illustrate your answer by a short analysis of the Monday, October 19th, 1987 US stock market crash as a lesson from history on portfolio insurance and the risks of feedback loops.