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CMFAS Exams

Appendix A — CPPI strategy worked examples

Parameters: initial $100; crash size 20%; multiplier 1/20%=51/20\% = 5; risky asset S&P index fund; five-year tenor.

  • Day 1 floor 85%: cushion 15; risky = 5×15 = $75; risk-free = $25.
  • New floor 86% with total still $100: cushion 14; risky = $70; risk-free = $30.
  • Portfolio at $86 after risky asset falls 20%: risky falls $70→$56; plus $30 risk-free = $86; liquidate all risky into risk-free, so later equity appreciation is missed.
  • Portfolio at $96: risky value $66, required risky allocation 5×(96−86)%=$505 \times (96 - 86)\% = \text{\$}50; sell $16 risky and hold $46 risk-free.
  • Portfolio at $110: required allocation 5×(110−86)%=$1205 \times (110 - 86)\% = \text{\$}120; if capped, put all $110 in risky; if leverage permitted, borrow $10 and hold $120 risky.
  • If leveraged risky value falls 20% from $120 to $96, repay $10 and move remaining $86 to risk-free. The crash has again locked the floor.

The reallocation repeats periodically. CPPI assumes an appreciating, relatively low-volatility asset with limited drawdown; a range-bound or gap-down market can cause buy-high/sell-low behaviour.