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CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision

An investor follows a constant proportion portfolio insurance plan with a floor of ₹7,00,000 and a multiplier of 3. The portfolio starts at ₹10,00,000, and equity is set at 3 × cushion, with the rest in bonds. Equity then falls 10% while bond value is unchanged. What rebalancing is required to restore the plan?

After the fall, equity is ₹8,10,000 and the portfolio ₹9,10,000. The cushion over the ₹7,00,000 floor is ₹2,10,000, so target equity is 3 × 2,10,000 = ₹6,30,000. The investor must sell equity worth ₹1,80,000 to rebalance.

  1. ASell equity worth ₹1,80,000Correct
  2. BBuy equity worth ₹1,80,000
  3. CSell equity worth ₹2,10,000
  4. DSell equity worth ₹90,000

Explanation

Initial equity = 3 × 3,00,000 = ₹9,00,000 and bonds are ₹1,00,000. After a 10% fall, equity is ₹8,10,000 and the portfolio is ₹9,10,000. The new cushion is 2,10,000, so the target equity is ₹6,30,000. The required sale is 8,10,000 − 6,30,000 = ₹1,80,000. Buying would be the wrong direction because CPPI sells on declines. ₹2,10,000 mistakes the cushion for the sale amount.

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