CAIA - CIT 3 - Dynamic Strategies for Asset Allocation

Question 1

A key component of the dynamic strategies centers on each strategy’s ___ and ___diagrams.

Answer 1

A key component of the dynamic strategies centers on each strategy’s payoff and exposure diagrams.

Question 2

In a ___ diagram, the horizontal axis represents the dollar value of the stock market, and the vertical axis represents the dollar value of the portfolio’s assets.

Answer 2

In a payoff diagram, the horizontal axis represents the dollar value of the stock market, and the vertical axis represents the dollar value of the portfolio’s assets.

Question 3

In an ___ diagram, the horizontal axis represents the dollar value of the assets, and the vertical axis represents the desired stock position in dollars.

Answer 3

In an exposure diagram, the horizontal axis represents the dollar value of the assets, and the vertical axis represents the desired stock position in dollars.

Question 4

The ___ diagram represents the decision rule of a strategy.

Answer 4

The exposure diagram represents the decision rule of a strategy.

Question 5

For a buy-and-hold strategy, there is a ___ relationship between the value of the portfolio and that of the stock market.

Answer 5

For a buy-and-hold strategy, there is a linear relationship between the value of the portfolio and that of the stock market.

Question 6

In the exposure diagram for all buy-and-hold strategies, the slope of the line is always ___.

Answer 6

In the exposure diagram for all buy-and-hold strategies, the slope of the line is always one.

Question 7

A ___ ___strategy maintains an exposure to stocks that is a constant proportion of wealth.

Answer 7

A constant mix strategy maintains an exposure to stocks that is a constant proportion of wealth.

Question 8

A constant mix strategy has a ___ payoff curve.

Answer 8

A constant mix strategy has a concave payoff curve.

Question 9

In a volatile market, the constant mix strategy will ___ the buy and hold strategy.

Answer 9

In a volatile market, the constant mix strategy will dominate the buy and hold strategy.

Question 10

The ___ ___ ___ ___strategy allocates assets dynamically over time.

Answer 10

The constant proportion portfolio insurance strategy allocates assets dynamically over time.

Question 11

Stock exposure using a CPPI strategy may be expressed as: (equation)

Answer 11

E = m(A - F)

E = stock exposure

m = multiplier greater than 1

A = Assets

F = Floor

Question 12

Payoff of CPPI (Equation)

Answer 12

F = Floor

A = Assets

S = Stock Position

m = Multiplier

r = Risk Free Rate

Question 13

An ___ ___ ___ ___ strategy is one that specifies an investment horizon and a desired floor at the horizon. The strategy consists of a set of rules that give the same payoff as a portfolio of T-bills and call options.

Answer 13

An option based portfolio insurance strategy is one that specifies an investment horizon and a desired floor at the horizon. The strategy consists of a set of rules that give the same payoff as a portfolio of T-bills and call options.

Question 14

The payoff diagram of a buy-and-hold strategy is ___, that of a constant mix strategy is ___and that of a CPPI strategy is ___.

Answer 14

The payoff diagram of a buy-and-hold strategy is linear, that of a constant mix strategy is concave and that of a CPPI strategy is convex.

Question 15

In trending markets, the expected performance of strategies with ___ payoff curves is strong, while that of strategies with ___payoff curves is weak.

Answer 15

In trending markets, the expected performance of strategies with convex payoff curves is strong, while that of strategies with concave payoff curves is weak.

Question 16

In flat and oscillating markets, the expected performance of strategies with ___ payoff curves is strong, while that of strategies with ___ payoff curves is weak.

Answer 16

In flat and oscillating markets, the expected performance of strategies with concave payoff curves is strong, while that of strategies with convex payoff curves is weak.

Question 17

___ strategies require resetting of parameters at the horizon, while the other strategies do not, and are appealing to investors with long time horizons.

Answer 17

OBPI strategies require resetting of parameters at the horizon, while the other strategies do not, and are appealing to investors with long time horizons.

Question 18

A rolling ___ strategy can be transformed into a constant mix strategy, which provides no downside protection. This can be accomplished by adjusting the floor to always remain a ___ ___of ___.

Answer 18

A rolling CPPI strategy can be transformed into a constant mix strategy, which provides no downside protection. This can be accomplished by adjusting the floor to always remain a constant fraction of assets.

Question 19

A rolling ___ strategy is essentially a constant-mix strategy if it rolls the horizon forward to keep it as far away as it was at the beginning.

Answer 19

A rolling OBPI strategy is essentially a constant-mix strategy if it rolls the horizon forward to keep it as far away as it was at the beginning.

Question 20

Raising the floor of a dynamic strategy typically results in stocks being ___ in both and up and down markets. Thus, the strategy provides expected payoffs that are ___to the right and ___to the left.

Answer 20

Raising the floor of a dynamic strategy typically results in stocks being sold in both and up and down markets. Thus, the strategy provides expected payoffs that are concave to the right and convex to the left.

Question 21

Floor (equation)

Answer 21

F = F₀e^rt