How does CPPI work?

CPPI is a strategy to combine the upside of equity market exposure with investments in a conservative financial instrument. This is done by allocating a specifically calculated percentage of investment to a risk account. A multiplier is used to determine the amount of risk that an investor is willing to undertake.

What is constant mix strategy?

Constant-mix strategy takes a contrarian view to maintaining a desired mix of assets, regardless of the amount of wealth you have. You are essentially buying low and selling high—as you sell the best performers to buy the worst performers.

How does portfolio insurance work?

Key Takeaways. Portfolio insurance is a hedging strategy used to limit portfolio losses when stocks decline in value without having to sell off stock. In these cases, risk is often limited by the short-selling of stock index futures. Portfolio insurance can also refer to brokerage insurance.

What is M in Cppi?

We notice that higher the value of Multiplier (M) higher would be the GAP risk. (1/M) is often referred to as the GAP size. It refers to the maximum loss that could be sustained between two rebalancing date before the portfolio breaks the protection floor.

What is principal protection?

A principal protected note (PPN) is a fixed-income security that guarantees a minimum return equal to the investor’s initial investment (the principal amount), regardless of the performance of the underlying assets.

What is index rebalancing?

Rebalancing a portfolio or index, as the term indicates, means rebalancing its composition. The rebalancing of an investment portfolio is therefore a modification implemented in order to keep it balanced and diversified, like it was conceived in the beginning according to its stated methodology.

What is option based portfolio insurance?

Option-based portfolio insurance (OBPI) refers to a set of strategies in which either a conventional put option (protective put) or a replicated put option (synthetic put) is used to insure a portfolio against adverse price movements.

What is the risk free return?

Risk-free return is the theoretical return attributed to an investment that provides a guaranteed return with zero risks. The risk-free rate of return represents the interest on an investor’s money that would be expected from an absolutely risk-free investment over a specified period of time.

What is an index linked GIC?

Index-linked GICs (guaranteed investment certificates) provide the buyer with a return that is “linked” to the direction of the stock market in a given period. A quick look at the rules on these deals may give you the impression that the investor can profit substantially with little risk.

What is reconstitution of an index?

What Is Reconstitution? Reconstitution involves the re-evaluation of a market index. The process involves sorting, adding, and removing stocks to ensure that the index reflects up-to-date market capitalization and style.

What is index reconstitution and rebalancing?

Rebalancing of price and market capitalization-weighted indices happens automatically and hence is not a concern. Reconstitution is the practice of adding or deleting securities from an index based on whether the securities are meeting the index criteria or not. It is a part of rebalancing exercise.

What rebalancing means?

Rebalancing is the process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk. For example, say an original target asset allocation was 50% stocks and 50% bonds.

What is PNL rebalancing?

Rebalancing is the process by which an investor restores their portfolio to its target allocation. Rebalancing brings your portfolio back to the desired asset mix. This is done by divesting in underperforming assets and investing in the ones that have the potential to grow.

What is tactical fund?

Tactical Allocation Funds and ETFs are actively managed investment strategies that shift the percentage of assets held in various categories based on prevailing market conditions. Typically, these funds are intended to reduce risk with a rule-based strategy that shifts between stocks, fixed income and cash.