Skip to content

CA Final · Advanced Financial Management · Portfolio Management

Arjun Capital runs a CPPI strategy on a ₹1,00,00,000 portfolio with a floor of ₹80,00,000 and a multiplier of 4. Initially equity exposure equals the multiplier times the cushion, and the rest is in safe assets. Equity then falls by 10%, the safe asset value is unchanged, and the portfolio is rebalanced to the CPPI rule. What transaction is needed?

Sell equity worth ₹24,00,000. After the fall, equity is ₹72 lakh and the portfolio ₹92 lakh. The cushion over the ₹80 lakh floor is ₹12 lakh, so CPPI allows equity of 4 × 12 = ₹48 lakh. The excess ₹24 lakh moves to safe assets.

  1. ASell equity worth ₹24,00,000 and move it to safe assetsCorrect
  2. BSell equity worth ₹48,00,000
  3. CBuy equity worth ₹8,00,000 to return to the original exposure
  4. DSell equity worth ₹12,00,000

Explanation

Initial cushion is ₹20 lakh, so equity is ₹80 lakh and safe assets ₹20 lakh. After a 10% fall equity is ₹72 lakh and the portfolio ₹92 lakh. The new cushion is ₹12 lakh, so target equity is 4 × 12 = ₹48 lakh, which means selling ₹24 lakh. ₹48 lakh is the target holding, not the amount to sell.

Did you get it right without looking?

One question tells you little. A timed set on Portfolio Management shows your real accuracy, how long you take and where you lose marks.

Practise Portfolio ManagementFree diagnostic mock

More Portfolio Management questions