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    Add as FriendPortfolio Revision

    by: sandesh

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    1 : Chapter 21 Portfolio Revision
    2 : Meaning of Portfolio Revision Portfolio revision involves changing the existing mix of securities. The objective of portfolio revision is similar to the objective of portfolio selection i.e. maximizing the return for a given level of risk or minimizing the risk for a given level of return. The process of portfolio revision may also be similar to the process of portfolio selection. This is particularly true where active portfolio revision strategy is followed. Where passive portfolio revision strategy is followed, use of mechanical formula plans may be made.
    3 : Need for Portfolio Revision The need for portfolio revision might simply arise because the market witnessed some significant changes since the creation of the portfolio. Further, the need for portfolio revision may arise because of some investor-related factors such as (i) availability of additional wealth, (ii) change in the risk attitude and the utility function of the investor, (iii) change in the investment goals of the investors and (iv) the need to liquidate a part of the portfolio to provide funds for some alternative uses. The other valid reasons for portfolio revision such as short-term price fluctuations in the market do also exist. There are, thus, numerous factors, which may be broadly called market related and investor-related, which spell need for portfolio revision.
    4 : Constraints in Portfolio Revision Some common constraints in portfolio revision are as follows: Transaction cost Taxes Statutory Stipulation No Single Formula
    5 : Formula Plans Formula Investing One type of formula investing, called dollar cost averaging, involves putting the same amount of money into a stock or mutual fund at regular intervals, so that more shares will be bought when the price is low and less when the price is high. Another formula investing method calls for shifting funds from stocks to bonds or vice versa as the stock market reaches particular price levels. If stocks rise to a particular point, a certain amount of the stock portfolio is sold and put in bonds. On the other hand, if stocks fall to a particular low price, money is brought out of bonds into stocks. Cont….
    6 : Basic Assumptions and Ground Rules of Formula Plan The formula plans are based on the following assumption. One, the stock prices move up and down in cycle. Two, the stock prices and the high-grade bond prices move in the opposite directions. Three, the investors cannot or are not inclined to forecast direction of the next fluctuations in stock prices, which may be due to lack of skill and resources or their belief in market efficiency or both. Cont….
    7 : Constant Dollar-Value Plan An investment strategy designed to reduce volatility in which securities, typically mutual funds, are purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving. Thus, as prices of securities rise, fewer units are bought, and as prices fall, more units are bought also called constant dollar plan, also called dollar cost averaging. Dollar Cost Averaging Dollar-Cost Averaging – DCA It is a technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. Also referred to as “constant dollar plan”. Cont….
    8 : Constant-Ratio Plan The constant-ratio plan specifies that the value of the aggressive portfolio to the value of the conservative portfolio will be held constant at the predetermined ratio. This plan automatically forces the investor to sell stocks as their prices rise, in order to keep the ratio of the value of their aggressive portfolio to the value of the conservative portfolio constant. Cont….
    9 : Variable-Ratio Plan Variable-ratio plan is a more flexible variation of constant ratio plan. Under the variable ratio plan, it is provided that if the value of aggressive portfolio changes by certain percentage or more, the initial ratio between the aggressive portfolio and conservative portfolio will be allowed to change as per the pre-determined schedule. Some variations of this plan provide for the ratios to vary according to economic or market indices rather than the value of the aggressive portfolio. Still others use moving averages of indicators. In order to illustrate the working of variable ratio plan let us continue with the previous example with the following modifications: The variable-ratio plan states that if the value of the aggressive portfolio rises by 20% or more from the present price of Rs. 25, the appropriate ratio of the aggressive portfolio will be 3:7 instead of the initial ratio of 1:1. Likewise, if the value of the aggressive portfolio decreases by 20% or more from the present price of Rs. 25, the appropriate percentage of aggressive portfolio to conservative portfolio will be.

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