Consider two portfolios with the same vale of $6,000,000, using like assets, stocks and the 10-year US Treasury Bond.

The portfolio manager 1 decided to apply the CPPI rebalancing strategy, assuming a maximum of 20% of stop loss, and will use a multiplier equal to 2.5 to define her initial allocation in stocks and T-Bonds.

The portfolio manager 2 prefers to apply the Constant Mix strategy to rebalance his portfolio, and will allocate 50% in stocks and 50% in T-Bonds.

1. Which are the allocations in value ($) for each one of these portfolios. Show all calculations for each strategy. What is the floor value for the CPPI portfolio?
2. A the the end of year 1, the stocks have decreased by 10% and the T-Bonds increased by 4%. Show the new allocations using each rebalancing strategy in value ($) and (%). You are expected to show the buy and selling transactions in stocks and T-Bonds for each portfolio.
3. At the end of the year 2, the market was bullish and the stocks increased by 8% and the T-Bonds increased by 2%. Show the new allocations using each rebalancing strategy in value ($) and (%). You are expected to show the buy and selling transactions in stocks and T-Bonds for each portfolio.
4. At the end of the year 3, the stocks increased again by 12% and T-Bonds increased by 1%. Show the new allocations using each rebalancing strategy in value ($) and (%). You are expected to show the buy and selling transactions in stocks and T-Bonds for each portfolio.
5. Which portfolio achieved the best performance at the end of year 3? How do you explain it by the CPPI and Constant Mix strategies applied to rebalance them?
6. After the last rebalance at the end of year 3, which portfolio is best positioned for a bullish stock market in year 4? Explain shortly in 2 sentences.