Portfolio Revision: 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 by
altering the proportion of funds invested in
securities.
 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
Availabilityof additional funds for investments

Change in risk tolerance
Change in investment goals
Need to liquidate a part of the portfolio to
provide funds for some alternative use

Constraints of Portfolio Revision
 Transaction Cost
 Taxes
 Statutory Stipulation
 Intrinsic Difficulty

Portfolio Revision Strategies
 Active Revision Strategy
 Passive Revision Strategy

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

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.

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).

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
Types of Formula Plans
 Rupee Cost Averaging Plan
 Constant Rupee Plan
 Constant Ratio Plan
 Variable Ratio Plan

Rupee Cost Averaging Plan
 “ Passive long term strategy”
 The investor should select regular

commitment of buying shares ate
regular intervals.

Rupee Cost Average Plan
Un
Total realize
No. of d Average Avg.
Price shares Share Invest. Cum. Mkt. Profits Cost Price
Quarters (Rs.) Bought s (Rs) Invest. Value (Rs.) (Rs.) (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
15.10.0
6 130 77 299 10010 40109 38870 (1239) 134.1 137
15.01.
07 152 66 365 10032 50141 55480 5339 137.4 140
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.

Constant Rupee Plan
Mkt. Value of
Price Total No. of Value of Stock Defensive
Period (Rs) Shares Portfolio 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
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

Constant Ratio Plan
Total Value Value of Ratio of Stock
Mkt. Price No. of of Stock Defensive Total PF Portion to Defensive
(Rs) Shares Portfolio Portfolio Value 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
Raj Kumar are sold and invested inPUbonds to make the equal 1:1
Faculty,
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

Variable Ratio Plan
Ratio of
Stock Shares
Share Value of Value of Total Portion to PF in
Price Stock Defensive PF Defensive Adjustm Stock
(Rs.) Portfolio Portfolio Value Portion ent 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
Sold 50
100 15800 5400 21200 74.5 Shares 158
100 10800 10800 21600 50.0 108

Costs of Revision
 Trading fees
 Market impact
 Management time
 Tax implications
 Window dressing
18
Trading Fees
 Commissions
 Transfer taxes
19
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
20
Management Time
 Most portfolio managers handle more

than one account
 Rebalancing several dozen portfolios

is time consuming
21
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
22
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
23

Portfolio Revision: Raj Kumar Faculty, PU

Uploaded by

Copyright:

Available Formats

Portfolio Revision: Raj Kumar Faculty, PU

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Portfolio Revision: Raj Kumar Faculty, PU

Uploaded by

Copyright:

Available Formats

Portfolio Revision

 It involves changing existing mix of securities. This

 It leads to purchases & sales of securities

 Objective of portfolio revision is to maximizing the

Raj Kumar Faculty, PU

Availabilityof additional funds for investments

Change in investment goals

Need to liquidate a part of the portfolio to

provide funds for some alternative use

Raj Kumar Faculty, PU

Raj Kumar Faculty, PU

 Active Revision Strategy

 Passive Revision Strategy

Raj Kumar Faculty, PU

Raj Kumar Faculty, PU

 It is a process of holding a well

Raj Kumar Faculty, PU

 It consists of predetermined rules regarding

Raj Kumar Faculty, PU

 Investor fund allocated to Fixed

Raj Kumar Faculty, PU

 “ Passive long term strategy”

 The investor should select regular

Raj Kumar Faculty, PU

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

 Two Portfolios – Aggressive &

 It enables the shift of investment

Raj Kumar Faculty, PU

1 50 200 10000 10000 20000

2 44 200 8800 10000 18800

3 40 200 8000 10000 18000

4 40 250 10000 8000 18000

5 44 250 11000 8000 19000

6 50 250 12500 8000 20500

7 50 250 10000 10500 20500

 It attempts to maintain a constant

 Attitude towards Risk

Raj Kumar Faculty, PU

50 100 5000 5000 10000 1

48 100 4800 5000 9800 0.96

45 100 4500 5000 9500 0.9

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

 At various levels of market price, the

 Long term trend estimation

Raj Kumar Faculty, PU

100 10000 10000 20000 50 --- 100

80 12640 5400 18040 70.1 Bought 58 158

Raj Kumar Faculty, PU

Raj Kumar Faculty, PU

Raj Kumar Faculty, PU

 Market impact is a real cost of trading

 Market impact is especially

 Most portfolio managers handle more