Question

In: Finance

please explain the implement CPPI and TIPP strategy as clearly as possible.

please explain the implement CPPI and TIPP strategy as clearly as possible.

Solutions

Expert Solution

CPPI

-> CPPI means Constant Proportion Portfolio Investment and one of the Re-balancing strategies.

-> It re-balances our portfolio during bad market conditions.

-> This Strategy talks about Risk reduction and how one can invest with capital guarantee in return.

-> One who uses this strategy have to use two types of Assets
  - High Risk Assets and (Equity Investments)

- Low Risk Assets. (Treasury Bobs)

-> Funds available for investment are allocated to Two Assets based on floor value.

-> When value of Equities is getting increased then Calculated Funds are diverted from Treasury Bonds to Equities and Vice-versa.

-> It is well for Bullish kind of Markets where Risk and Returns are high.

TIPP

-> TIPP stands for Time Invariant Portfolio Protection Strategy

-> It is also one of one the dynamic strategies used to balance risk in Portfolio

-> All the Working mechanism of CPPI and TIPP is same except one key difference.

-> When Investment in Risky Assets like Equity is touching floor ( Initially estimated lower value of Investment) then investment in risk Assets are diverted to Risk Free Assets and

-> If Value of Risky Assets is getting increased then funds are not diverted from Risk free to Risky under this Strategy. Contrary to this, In CPPI, Funds can be diverted from Risk free to Risky and vice versa.


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