In a constant mix strategy, how is the target investment in stocks determined?

In a constant mix strategy, the target investment in stocks is determined by multiplying the weight of stocks by the current portfolio value. This approach maintains a predefined allocation between stocks and bonds (or other asset classes) regardless of market movements. By ensuring that the weight of the stocks remains constant, the investor continuously rebalances the portfolio to the desired level of risk.

This method accommodates changes in portfolio value due to market fluctuations. For example, if the stocks perform well and their value increases relative to the total portfolio, the investor will sell some stocks to buy bonds or other assets to revert back to the target allocation. Conversely, if stocks underperform, the investor will buy more stocks to bring the allocation back in line with the target weight. This systematic rebalancing helps to enforce discipline in the investment process and maintain the intended risk profile.

Other options could imply different approaches to asset allocation that do not capture the essence of the constant mix strategy, which is focused on maintaining the target weight as a function of overall portfolio value rather than relying solely on market trends or offering a fixed percentage unrelated to portfolio performance.