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Availability of 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
Portfolio revision 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. Portfolio revision 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
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Transaction Cost Taxes Statutory Stipulation Intrinsic Difficulty
Active Revision Strategy Passive Revision Strategy
The frequency of trading is likely to be much higher resulting in higher transaction cost. Passive Revision Strategy : it involves only minor & infrequent adjustments to the portfolio over time. They hope to use their best estimates to excess returns.
2. Under this.1.
Active Revision Strategy : This involves frequent & substantial adjustments to the portfolio.
. adjustment to portfolio is carried according to predetermined rules & procedures designated as formula plans.
` The formula plans specify predetermined rules for the transfer of funds from aggressive portfolio to the defensive portfolio & vice versa. ` In this. the investor divide his investment funds into 2 portfolios i. These predetermined rules call for specified actions when there are changes in the securities market. These rules enable the investors to automatically sell shares when their prices are rising & buy shares when their prices are falling.e.Formula plans consists of predetermined rules regarding when to buy or sell & how much to buy or sell.
. one aggressive(portfolio consists of equity shares) & other conservative or defensive ( bonds & debentures).
Constant Ratio Plan 3. Dollar Cost Averaging
.1. Constant Rupee Value Plan 2.
owing to falling interest rates. The conservative portfolio tends to decline during periods of prosperity. While the stock prices are rising.
. The conservative (defensive) portfolio must include high. the greater the profits the formula plan can yield.1)
Formula plans require the investor to divide his investment funds in two portfolios i.e. the aggressive portfolio also rises. therefore. the larger the difference between the two. aggressive &
The volatility of aggressive portfolio must be greater than that of conservative portfolio.grade bonds having a high degree of safety and stability of the returns.
The formula plans do not deal with the selection of stocks or bonds.
. If they move in same direction then this phenomenon certainly impairs profitability of the formula plans. 6.The basic premise of formula plans is that stock and bond prices of the portfolios move in opposite direction.5.