The document discusses different portfolio management strategies including constant dollar value plan, constant ratio plan, and variable ratio plan.
The constant dollar value plan involves rebalancing the portfolio whenever the value of the aggressive portfolio changes by 20% or more. The constant ratio plan rebalances to maintain a target ratio, such as 1:1, between the aggressive and conservative portions whenever the actual ratio deviates by 15% or more.
The variable ratio plan starts with a 50-50 allocation and changes the ratio between the aggressive and conservative portions based on changes in the stock price. If the stock price increases 20% or more, the ratio becomes 2:8, and if it declines 20% or more, the ratio becomes 8:
The document discusses different portfolio management strategies including constant dollar value plan, constant ratio plan, and variable ratio plan.
The constant dollar value plan involves rebalancing the portfolio whenever the value of the aggressive portfolio changes by 20% or more. The constant ratio plan rebalances to maintain a target ratio, such as 1:1, between the aggressive and conservative portions whenever the actual ratio deviates by 15% or more.
The variable ratio plan starts with a 50-50 allocation and changes the ratio between the aggressive and conservative portions based on changes in the stock price. If the stock price increases 20% or more, the ratio becomes 2:8, and if it declines 20% or more, the ratio becomes 8:
The document discusses different portfolio management strategies including constant dollar value plan, constant ratio plan, and variable ratio plan.
The constant dollar value plan involves rebalancing the portfolio whenever the value of the aggressive portfolio changes by 20% or more. The constant ratio plan rebalances to maintain a target ratio, such as 1:1, between the aggressive and conservative portions whenever the actual ratio deviates by 15% or more.
The variable ratio plan starts with a 50-50 allocation and changes the ratio between the aggressive and conservative portions based on changes in the stock price. If the stock price increases 20% or more, the ratio becomes 2:8, and if it declines 20% or more, the ratio becomes 8:
The document discusses different portfolio management strategies including constant dollar value plan, constant ratio plan, and variable ratio plan.
The constant dollar value plan involves rebalancing the portfolio whenever the value of the aggressive portfolio changes by 20% or more. The constant ratio plan rebalances to maintain a target ratio, such as 1:1, between the aggressive and conservative portions whenever the actual ratio deviates by 15% or more.
The variable ratio plan starts with a 50-50 allocation and changes the ratio between the aggressive and conservative portions based on changes in the stock price. If the stock price increases 20% or more, the ratio becomes 2:8, and if it declines 20% or more, the ratio becomes 8:
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Portfolio Revision
‘Buy low and sell high’ is the objective of every investor.
Is it practically possible to identify lows to buy (driven by fear) and highs to sell (driven by greed)? Formula plans: Put triggering points, if price goes up by x%, you sell in aggressive portfolio Put triggering points, if price goes down by x%, you buy aggressive portfolio
1. Constant Dollar Value Plan:
An investor has Rs 50 lakh to invest. He wants to use the constant dollar value plan for managing his investments. He wants to invest his money equally in stocks and bonds. He identified HPCL for investing, which is currently trading at Rs 500. He wants to revise his portfolio whenever there is a 20% or more change in the value of the aggressive portfolio. If the share price movements are as follows: 500, 440, 400, 420, 480, 520, 580, 540 and 500. Show how the rebalancing of the portfolio can be carried out. Compare the gains from the constant dollar value plan with those from a passive buy and hold strategy.
Constant Dollar Value Plan
Stock Price Value of Buy Value of Value of Total Value of Revaluation Total Number and Hold Conservative Aggressive Constant Dollar Action of Securities Portfolio Portfolio Portfolio Value Plan (Buy/Sell Held in Securities) Aggressive Portfolio 1 2 3 4 =1×7Pre 5= 3+4 6 7 500 50,00,000 25,00,000 25,00,000 50,00,000 5000 440 44,00,000 25,00,000 22,00,000 47,00,000 5000 400 40,00,000 25,00,000 20,00,000 45,00,000 400* 40,00,000 20,00,000 25,00,000 45,00,000 Buy 6250
1 5,00,000/400 = 1250 shares @ 400 420 42,00,000 20,00,000 26,25,000 46,25,000 6250 480 48,00,000 20,00,000 30,00,000 50,00,000 480* 48,00,000 25,00,000 25,00,000 50,00,000 Sell 5208 5,00,000/480 = 1042 shares @ 480 520 52,00,000 25,00,000 27,08,160 52,08,160 5208 580 58,00,000 25,00,000 30,20,640 55,20,640 580* 58,00,000 30,20,640 25,00,000 55,20,640 Sell 4310 (5,20,640/580 = 898 shares) 540 54,00,000 30,20,640 23,27,400 53,48,040 4310 500 50,00,000 30,20,640 21,55,000 51,75,640 When the entire cycle gets repeated, constant dollar value plan may exhibit better performance than buy and hold strategy When the market goes down, constant dollar value plan may exhibit better performance than buy and hold strategy When the market goes up, buy and hold strategy may exhibit better performance than constant dollar value plan 2. Constant Ratio Plan: The investment portfolio of Mr. Rajiv Sharma consists of an aggressive stock, and risk-free fixed income securities in the ratio of 1:1. Current market value of the portfolio is Rs 50 lakh. He would like to use Constant Ratio Plan for the revision of the portfolio. The target ratio for the aggressive stock and risk free fixed income securities (conservative portfolio) is 1:1. He rebalances the portfolio whenever the actual ratio deviates from the target by 15% or more. The current market price of the stock is Rs 200. Assuming the following movements in the share price, 200, 220, 240, 260, 280, 260, 240, 220 and 200 show how the rebalancing of the portfolio can be carried out. Also compare the performance of constant ratio plan with that of buy and hold strategy.
Constant Ratio Plan
2 Stock Value of Buy and Hold Value of Value of Total Value Ratio between Rebalancing Total No. of Price Strategy Conservative Aggressive of Constant Aggressive and Action Shares in Portfolio Portfolio Ratio Plan Conservative Aggressive Portfolio 1 2 3 4=1×8Pre 5 = 3+4 6 = 4/3 7 8 = 8Pre-7 200 50,00,000 25,00,000 25,00,000 50,00,000 1:1 12,500 220 220/200×50,00,000 = 25,00,000 27,50,000 52,50,000 1.1:1 12,500 55,00,000 240 60,00,000 25,00,000 30,00,000 55,00,000 1.2:1 12,500 240* 60,00,000 27,50,000 27,50,000 55,00,000 1:1 Sell (30,00,000- 11458 27,50,000)/240 = 1042 shares at 240 each 260 65,00,000 27,50,000 29,79,080 57,29,080 1.083:1 11458 280 70,00,000 27,50,000 32,08,240 59,58,240 1.17:1 280* 70,00,000 29,79,120 29,79,120 59,58,240 1:1 Sell 10640 (32,08,240- 29,79,120)/28 0 = 818 shares each at 280 260 65,00,000 29,79,120 27,66,400 57,45,520 0.928:1 10640 240 60,00,000 29,79,120 25,53,600 55,32,720 0.857:1 10640 220 55,00,000 29,79,120 23,40,800 53,19,920 0.785:1 220* 55,00,000 26,59,960 26,59,960 53,19,920 1:1 Buy (26,59,960 12091 -23,40,800)/220 = 1451 shares each at 220 200 50,00,000 26,59,960 24,18,200 50,78,160 0.909:1 12091
3. Variable Ratio Plan:
3 The total amount of an investor’s is Rs 50 lakh, which he wants to invest using a variable ratio plan. Initially has decided that 50% of the corpus i.e. Rs 25 lakh, should be invested in an aggressive portfolio comprising stocks of SBI and the balance Rs 25 lakh in a conservative portfolio comprising bonds. The investor wants to rebalance the portfolio if the stock price increases by 20% or more, the ratio of aggressive portfolio to the conservation portfolio will be 2:8. If the stock price declines by 20% or more, the ratio of aggressive portfolio to conservative portfolio will be changed to 8:2. Assuming the following stock price movements; 250, 280, 300, 280, 260 and 240 show how rebalancing of the portfolio can be carried out. Compare the performance of variable ratio plan with that of simply buy and hold strategy.
Variable Ratio Plan
Price Value of Buy and Value of Value of Total Value Ratio Rebalancing Action Total No. Hold Strategy Conservative Aggressive of Variable Point of Shares Portfolio Portfolio Ratio Plan in Aggressive Portfolio 1 2 3 4 5 = 3+4 6 = 4/3 7 8= 250 50,00,000 25,00,000 25,00,000 50,00,000 1:1 10,000 280 280/250×50,00,000 25,00,000 28,00,000 53,00,000 1.12:1 10,000 = 56,00,000 300 60,00,000 25,00,000 30,00,000 55,00,000 1.2:1 300* 60,00,000 44,00,000 11,00,000 55,00,000 2:8 or Sell (30,00,000- 3668 (2/10×55,00,00 11,00,000)/300 = ) 6,332 shares each at 300 280 56,00,000 44,00,000 10,27,040 54,27,040 0.23:1 3668
