CA Final · Advanced Financial Management · Portfolio Management
Rohan Securities starts a CPPI strategy with ₹1,00,00,000, a floor of ₹70,00,000 and a multiplier of 3. Leverage is not permitted, so equity cannot exceed the portfolio value. Step 1: initial allocation is made by the rule. Step 2: equity rises 20% and the portfolio is rebalanced. Step 3: equity then falls 25% and the portfolio is rebalanced again. What is the equity holding after the final rebalancing?
Equity after the final rebalancing is ₹55,50,000. After the first rise the rule would allow ₹144 lakh, but the no-leverage cap limits equity to ₹118 lakh. After the 25% fall the portfolio is ₹88.5 lakh, the cushion is ₹18.5 lakh, and 3 × 18.5 gives ₹55.5 lakh.
- A₹63,00,000
- B₹55,50,000Correct
- C₹54,00,000
- D₹36,00,000
Explanation
Initial cushion is ₹30 lakh, so equity is ₹90 lakh and safe assets ₹10 lakh. After a 20% rise equity is ₹108 lakh and the portfolio ₹118 lakh. The rule says 3 × 48 = ₹144 lakh, but the cap limits equity to ₹118 lakh, using up the safe assets. After a 25% fall equity is ₹88.5 lakh with no safe assets, so the cushion is ₹18.5 lakh and target equity is ₹55.5 lakh. Ignoring the cap gives the wrong answer ₹36 lakh.
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.
More Portfolio Management questions
- In a Fama-French style three-factor model, which set of factors is used to explain portfolio returns?
- Sundaram Asset Managers reports that its Balanced Fund earned an average return of 14% with a standard deviation of 16%. The risk-free rate …
- Under a two-factor APT model, the risk-free rate is 6%, the risk premium for factor 1 (GDP growth) is 4% and for factor 2 (inflation surpris…
- Meera follows a constant ratio plan with a 50:50 split between equity and bonds. She starts with Rs 5,00,000 in each. Equity later rises to …
- Under a two-factor APT model, the risk-free rate is 6%. Factor 1 (industrial output) has a risk premium of 4% and factor 2 (interest-rate mo…
- A trust uses a CPPI strategy on a ₹100 lakh portfolio, with a floor of ₹80 lakh and a multiplier of 4. Initially, equity exposure = 4 × (100…