A CPPI portfolio has a floor value of $4 million in stocks, a market value of $7 million, and a multiplier of 1.5. If the value of the portfolio increases 20%, the investment in stocks should be
A) $4.4 million
B) $4.8 million
C) $5.4 million
D) $6.6 million

Question

Quizplus · Accepted Answer

The cushion is the difference between the market value and the floor value, which is $7 million - $4 million = $3 million. With a multiplier of 1.5, the investment in stocks is 1.5 * $3 million = $4.5 million. If the portfolio increases by 20%, the new market value is $7 million * 1.2 = $8.4 million. The new cushion is $8.4 million - $4 million = $4.4 million. The new investment in stocks is 1.5 * $4.4 million = $6.6 million.

A CPPI Portfolio Has a Floor Value of $4 Million