Raj Kumar Faculty, PU
Portfolio Revision
It involves changing existing mix of securities. This can be done by changing the securities currently included in portfolio or byaltering the proportion of funds invested insecurities.
It leads to purchases & sales of securities
Objective of portfolio revision is to maximizing the return for a given level of risk or minimization the risk for the given level of return
Raj Kumar Faculty, PU
Need for Portfolio Revision
Availability of additional funds for investmentsChange in risk toleranceChange in investment goalsNeed to liquidate a part of the portfolio to provide funds for some alternative use
Raj Kumar Faculty, PU
Constraints of Portfolio Revision
Transaction Cost Taxes Statutory Stipulation Intrinsic Difficulty
Raj Kumar Faculty, PU
Portfolio Revision Strategies
Active Revision Strategy
Passive Revision Strategy
Raj Kumar Faculty, PU
Active management
It is one in which the composition of the portfolio is dynamic The portfolio manager periodically
changes: The portfolio components or The components’ proportion within the
portfolio
Raj Kumar Faculty, PU
Passive Management Strategy
It is a process of holding a well diversified portfolio for a long term with buy and hold approach. It refers to the investors attempt to construct a portfolio that resembles the overall market returns.
Raj Kumar Faculty, PU
Formula Plans
It consists of predetermined rules regarding when to buy or sell & how much to buy or sell. These predetermined rules call for specified actions when there are changes in the securities market.
Investment funds i). Aggressive (Equity shares)ii). Conservative or defensive (bonds
& debentures).
Raj Kumar Faculty, PU
Assumptions
Investor fund allocated to Fixed Income securities and Common Stocks
PF – Aggressive in Low Market & Defensive when market is rising
Stocks are bought and sold – change in Prices
Follow one formula which he chosen Select the good stocks
Raj Kumar Faculty, PU
Types of Formula Plans
Rupee Cost Averaging Plan Constant Rupee Plan Constant Ratio Plan Variable Ratio Plan
Raj Kumar Faculty, PU
Rupee Cost Averaging Plan
“ Passive long term strategy”
The investor should select regular commitment of buying shares ate regular intervals.
Raj Kumar Faculty, PU
Rupee Cost Average Plan
QuartersPrice (Rs.)
shares Bought
Total No. of Share
sInvest.
(Rs)Cum.
Invest.Mkt. Value
Un realize
d Profits (Rs.)
Average Cost (Rs.)
Avg. Price (Rs.)
1 2 3 4 5 6 7 (2x4) 8 [ 7-6] 9 [ 6/ 4 ] 10
15.1. 06 112 90 90 10080 10080 10080 ---- 112 112
15.4. 06 142.5 70 160 9975 20055 22800 2745 125.3 127
15.7. 06 162 62 222 10044 30099 35964 5865 135.6 139
15.10.06 130 77 299 10010 40109 38870 (1239) 134.1 137
15.01. 07 152 66 365 10032 50141 55480 5339 137.4 140
Raj Kumar Faculty, PU
Constant Rupee Plan
Two Portfolios – Aggressive & Conservative
It enables the shift of investment from bonds to stocks and vice-versa by maintaining a constant amount invested in the stock portion of portfolio.
Raj Kumar Faculty, PU
Constant Rupee Plan
Period
Mkt. Price (Rs)
Total No. of Shares
Value of Stock Portfolio
Value of Defensive Portfolio Total
1 50 200 10000 10000 20000
2 44 200 8800 10000 18800
3 40 200 8000 10000 18000
4 40 250 10000 8000 18000
Bought 50 Shares
5 44 250 11000 8000 19000
6 50 250 12500 8000 20500
7 50 250 10000 10500 20500
Sold 50 Shares
Raj Kumar Faculty, PU
Constant Ratio Plan
It attempts to maintain a constant ratio between the aggressive and conservative portfolios. It is fixed by the Investor.
Attitude towards Risk
Raj Kumar Faculty, PU
Constant Ratio Plan
Mkt. Price(Rs)
Total No. of Shares
Value of Stock Portfolio
Value of DefensivePortfolio
Total PF Value
Ratio of Stock Portion to Defensive
Portion
50 100 5000 5000 10000 1
48 100 4800 5000 9800 0.96
45 100 4500 5000 9500 0.9
Rs. 248 transferred form bond portion and 5.5 shares purchased
45 105.5 4748 4752 9499.5 1
40.5 105.5 4273 4752 9024.75 0.9
Bought 5.9 shares by transferring Rs.239 from bond portion
40.5 111.4 4512 4511 9023 1
44.5 111.4 4957 4511 9468 1.1
5 Shares are sold and invested in bonds to make the equal 1:1
Raj Kumar Faculty, PU
Variable Ratio Plan
At various levels of market price, the proportions of the stocks and bonds change. Whenever the price of the stock increases, the stocks are sold and new ratio is adopted by increasing the proportion of defensive or conservative portfolio.
Long term trend estimation
Raj Kumar Faculty, PU
Variable Ratio Plan
Share Price (Rs.)
Value of Stock
Portfolio
Value of Defensive
Portfolio
Total PF
Value
Ratio of Stock
Portion to Defensive Portion
PF Adjustm
ent
Shares in
Stock Portion
100 10000 10000 20000 50 --- 100
90 9000 10000 19000 47.4 --- 100
80 8000 10000 18000 44.4 --- 100
80 12640 5400 18040 70.1 Bought 58 158
–
90 14220 5400 19620 72.5 158
100 15800 5400 21200 74.5Sold 50 Shares 158
100 10800 10800 21600 50.0 108
Raj Kumar Faculty, PU
Costs of Revision
Trading fees Market impact Management time Tax implications Window dressing
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Raj Kumar Faculty, PU
Trading Fees
Commissions Transfer taxes
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Raj Kumar Faculty, PU
Market Impact
The market impact of placing the trade is the change in market price purely because of executing the trade
Market impact is a real cost of trading
Market impact is especially pronounced for shares with modest daily trading volume
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Raj Kumar Faculty, PU
Management Time
Most portfolio managers handle more than one account
Rebalancing several dozen portfolios is time consuming
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Raj Kumar Faculty, PU
Tax Implications
Individual investors and corporate clients must pay taxes on the realized capital gains associated with the sale of a security
Tax implications are usually not a concern for tax-exempt organizations
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Window Dressing
Window dressing refers to cosmetic changes made to a portfolio near the end of a reporting period
Portfolio managers may sell losing stocks at the end of the period to avoid showing them on their fund balance sheets
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Raj Kumar Faculty, PU
