Portfolio Parameters

$
Total starting portfolio value
%
Used by buy-and-hold and constant-mix (e.g., 60 for 60/40)
$
Minimum portfolio value CPPI aims to protect
x
Stocks = m × Cushion (typical range: 2-5)
%
Annual rate, converted to per-period rate
Number of periods to simulate
%
%

Quick Reference

Buy-and-Hold

No rebalancing; stocks and bills drift freely

Constant-Mix

Rebalance to target weight each period
Stocks = w × Portfolio

CPPI

Cushion = max(Portfolio - Floor, 0)
Stocks = min(m × Cushion, Portfolio)
Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

Strategy Comparison

Buy-and-Hold
--
Stock Weight: --
Constant-Mix
--
Stock Weight: --
CPPI
--
Cushion: --
Stock Weight: --

Wealth Path

Payoff Profile

Terminal portfolio value across a range of total stock returns (-30% to +30%), distributed evenly across periods.

Period-by-Period Breakdown

Period Stock Return B&H Value B&H Wt CM Value CM Wt CPPI Value CPPI Wt
Enter values to see results

Model Assumptions

  • Stocks earn the specified per-period return; bills earn the risk-free rate (annual rate / # periods)
  • Buy-and-hold: no rebalancing; initial stock/bill split drifts with returns
  • Constant-mix: rebalanced to exact target weight at the start of each period
  • CPPI: stock allocation = min(m × cushion, portfolio); remainder in bills
  • No transaction costs, taxes, or bid-ask spreads
  • Random mode uses normally distributed returns (Box-Muller method)

For educational purposes. Not financial advice. Market conventions simplified.

Step-by-Step Breakdown

Enter values to see the step-by-step calculation.

Understanding Dynamic Rebalancing Strategies

What is Dynamic Rebalancing?

Dynamic rebalancing refers to strategies that adjust portfolio allocations over time in response to market movements. The three strategies compared here represent fundamentally different philosophies: letting markets drift (buy-and-hold), maintaining discipline (constant-mix), and protecting downside while capturing upside (CPPI).

Three Strategy Philosophies

Buy-and-Hold

Set initial allocation and let it drift. Stock weight increases in bull markets, decreases in bear markets. Linear payoff profile. Lowest turnover and transaction costs.

Constant-Mix

Rebalance to target each period. Sells winners, buys losers. Concave payoff, benefits from mean reversion. Moderate turnover. Best in choppy, range-bound markets.

CPPI

Cushion-based allocation with floor protection. Convex payoff like a call option. Increases exposure in rallies, reduces in drawdowns. Best in trending markets.

Payoff Profiles and Market Conditions

The payoff profile chart reveals the key insight: buy-and-hold is linear (proportional to market return), constant-mix is concave (underperforms in trending markets, outperforms in mean-reverting ones), and CPPI is convex (protects downside while amplifying upside). No single strategy dominates in all market environments.

Key Insight: Use the Portfolio Rebalancing Calculator to explore optimal rebalancing frequencies, and the Capital Allocation Calculator to determine your initial target allocation.

Frequently Asked Questions

Constant Proportion Portfolio Insurance (CPPI) is a dynamic asset allocation strategy that sets a floor value for the portfolio and allocates to risky assets based on a multiple of the cushion (portfolio value minus floor). When markets rise, CPPI increases stock exposure; when markets fall, it reduces exposure to protect the floor. The formula is: Stocks = m × max(Portfolio - Floor, 0), where m is the multiplier.

Buy-and-hold sets an initial allocation and lets it drift with market returns (no rebalancing). Constant-mix rebalances to a fixed target allocation each period (e.g., always 60/40). CPPI dynamically adjusts based on a floor and multiplier, increasing stock exposure as portfolio value rises above the floor. Buy-and-hold produces a linear payoff, constant-mix is concave, and CPPI is convex.

The CPPI multiplier (m) determines how aggressively the strategy allocates to stocks based on the cushion. A higher multiplier means more stock exposure for a given cushion. Typical values range from 2 to 5. Higher multipliers amplify gains in rising markets but increase the risk of hitting the floor in volatile markets. The multiplier should reflect your risk tolerance and market outlook.

The floor is the minimum acceptable portfolio value that the CPPI strategy aims to protect. The cushion is the difference between the current portfolio value and the floor: Cushion = Portfolio - Floor. When the cushion is large, more is allocated to stocks. When the portfolio approaches the floor, the strategy shifts heavily to bills to preserve capital. If the portfolio hits the floor, all assets move to bills.

CPPI produces a convex payoff because it increases stock exposure as markets rise (capturing more upside) and decreases exposure as markets fall (limiting downside). This creates an option-like payoff pattern where losses are bounded by the floor but gains are amplified. In contrast, constant-mix has a concave payoff because it sells winners and buys losers (rebalancing to target), and buy-and-hold is linear.

CPPI tends to underperform constant-mix in choppy, mean-reverting markets. When prices oscillate without a clear trend, CPPI buys at highs (increasing exposure after gains) and sells at lows (reducing after losses), suffering from whipsaw. Constant-mix benefits from mean reversion because it automatically buys low and sells high through rebalancing. CPPI performs best in trending markets with sustained moves.
Disclaimer

This calculator is for educational purposes only and uses simplified models. Actual portfolio management involves transaction costs, taxes, liquidity constraints, and market impact. CPPI does not guarantee the floor will be maintained in continuous markets with gap risk. Consult a qualified financial advisor for personalized investment advice.

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Course by Ryan O'Connell, CFA, FRM

Portfolio Analytics & Risk Management Course

Master portfolio theory and risk management from fundamentals to advanced analytics. Covers modern portfolio theory, risk metrics, performance evaluation, and factor models.

  • Dynamic rebalancing strategies: CPPI, constant-mix, buy-and-hold
  • Modern Portfolio Theory and efficient frontier construction
  • Risk metrics: VaR, CVaR, drawdown analysis
  • Hands-on exercises with real portfolio data
View Course