CPPI – Technical Terms
- ‘The Bond Floor’ is the present value of the minimum guaranteed portfolio return.
- ‘The Net Asset Value’ (NAV) is the current value of the portfolio and is simply the sum of the ‘risky’ and ‘non-risky’ portfolio components.
- ‘The Cushion’ is defined as the difference between the NAV and the Bond Floor.
- ‘The Gap’ is simply ‘The Cushion’ expressed as a percentage to the Portfolio’s Equity Value:
Gap = (NAV – Bond Floor)/(Equity Value)
- ‘The Equity Multiplier’ : A fixed factor that is used to calculate the Equity Weight (see below). The actually level used is often dependant on the volatility of the risky asset.
- ‘The Equity Weight’ is the proportion of the CPPI Portfolio allocated to the ‘risky’ component. It is calculated as:
Weight = Multiplier x (NAV – Bond Floor)/NAV