Portfolio X, a CPPI portfolio, has a floor value of $8.0 million, a market value of $10 million, and a multiplier of 2.5. The portfolio is rebalanced annually.

a) In the first year, stocks increase by 20% and bonds decrease by 10%. In the second year, stocks decrease by 10% and bonds increase by 5%. Determine the amount of investment for stocks and bonds respectively for Portfolio X at the end of second year after rebalancing. [6 marks]

Portfolio Y, a constant mix strategy of 50% stocks and 50% bonds, has a market value of $10 million. This portfolio is also rebalanced annually.

b) Similar to a) above, stocks increase by 20% and bonds decrease by 10% in the first year. Then stocks decrease by 10% and bonds increase by 5% in the second year. Determine the amount of investment for stocks and bonds respectively for Portfolio Y at the end of second year after rebalancing. [6 marks]

c) Comment on the relative performance of the CPPI and constant mix strategies in a) and b) and explain why. [3 marks]