Portfolio Revision

Portfolio Revision
 Change in risk involved in portfolio
 Changes in objectives and preferences of
investor
 Alteration in the characteristics of securities
 Portfolio Revision involves the following:
 Portfolio Rebalancing
 Portfolio Upgrading
Portfolio Rebalancing

It involves reviewing and revising the portfolio

composition. It has three basic policies:
 Buy and Hold Policy
 Constant Mix Policy
 Portfolio Insurance Policy
Portfolio Upgrading

It involves shifting from stocks to bonds and

vice-versa. Portfolio Upgrading calls for
 Reassessing the risk-return characteristics of
various securities
 Selling Over-priced securities
 Buying under-priced securities
Techniques of Portfolio Revision

Formula Plans
 Constant Rupee Value Plan
 Constant Ratio Plan
 Variable Ratio Plan
Rupee Cost average
Formula Plans
Formula Plans assist in determination of time to make revision
in portfolio. It draw a course of action to an investor to make
revision in portfolio. These plans give the basic rules and
regulations for purchasing and selling the securities. It assists
in determination of total amount that should be spent by the
investor but don’t assist in selection of securities.

Investors use these plans to help them in making decision for

the future by exploiting the fluctuations in prices. The user of
these plans are placed in better position in comparison to
those investors who are not using these plans.
Features

 These plans are rigid and non-flexible.

 These are of little importance in short-time
prediction.
 These are not a substitute for forecasting.
 The plan works when investor has two
portfolios - aggressive portfolio and
conservative portfolio.
Estimation of difference between movements of
aggressive portfolio and conservative portfolio:
 Shifting from Conservative portfolio to aggressive,
when there is downward movement in conservative
portfolio.
 Shifting from aggressive portfolio to conservative
portfolio, when there is downward movement in
aggressive portfolio.
 Greater the movements: Higher the profit from
formula plans.
 It assumes that bonds are useful investment for
current income. Their prices fall in a boom period and
interest rate start to rise.
Continued

 Investor looking for good current income, must

go for conservative portfolio.
 Fluctuation in the prices of bonds and stocks in
an opposite direction has always been a desirable
situation but it may not be a realistic situation.
 Formula plan assist in determination of ‘turning
points’.
 Investors are suggested to keep some balance of
conservative portfolio in his hands.
Constant Rupee Value Plan
 Simplest Method
 Specify the % of aggressive portfolio in fund.
 According to this method, aggressive portfolio in fund should remain
constant.
 Investors are guided by action (revaluation) points i.e. the time when
action should be taken.
 Investor should sale his share when the stock value increases (so as to
be intact) and vice-versa.
 Fluctuations in stock should take place before the investor make
changes for re-adjustments.
 Investor must have knowledge regarding depression value of
fluctuations but forecasting of upper limit is not required.
 The method is usually applied to a single common stock.
Constant Ratio Plan

It advocates that the ratio of aggressive portfolio to

conservative as well as total portfolio should remain
constant.
K= Market Value of Common Stock
Market Value of Total Portfolio
Stock should be sold at the time price rise, to make its
proportion constant and vice-versa.
It is less aggressive to constant value plan as it is applied with
due consideration to total portfolio the value of which also
fluctuate with the fluctuation in aggressive portfolio.
Continued

 This method doesn’t require knowledge of lower

limit.
 The middle range of fluctuations is deciding factor
for the sale and purchase of aggressive funds.
 More Profit to investor through this method: If
there is sustained rise or fall in the prices as it
leaves investor in a more optimistic situation.
 This method is not good in real full cycle
fluctuations.
Variable Ratio Plan
 Investor should sale bonds and purchase
stock when stock prices fall.
 Investor must sell stock when the stock price
rises and bonds should be purchased.
 Desired ratio of stock is as follows:

Prices Upward Movement Downward Movement

Very High Prices 0.30 0.00
High Prices 0.50 0.10
Moderate Prices 0.70 0.30
Low Prices 0.90 0.50
Very Low Prices 1.00 0.70
Modifications of Formula Plan
 Modification are required as stock price may
not move in predicted manner.
 Historical data may fail to predict future.
 Delay in making changes during the action
points.
 Bringing flexibility in formula plans as per the
requirement of investor and environment in
which he is operating.
 Investor may continue to invest in same
security (although the action point has arrived),
if he expects an exploitation of the trends.
Rupee Cost Average
 Suitability:
 This is technique for those investors who don’t have a money
to invest but are required to build a fund and want to invest
the same in future.
 Requirement:
 Under this method investor should continuously invest a
constant sum in a specified stock of a specified portfolio at
periodic differences.
 Methodology:
 Investor is suggested to buy security when it is offered at
lower price.
Continued

Thus the accumulation of fund is made at different

stock prices and then the average cost of share is
being computed. Now the investor may shift to
any formula plan for revision.
This method reduces transaction cost and cost of
commission.
Portfolio Selection: Not helpful in portfolio selection
Desirable Time: Long run
More Gain: Greater Fluctuations