Saturday, 11 January 2020

Unit 14: Portfolio Revision

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Unit 14: Portfolio Revision

The portfolio revision strategies adopted by investors can be broadly classified as ‘active’ and ‘passive’ revision strategies.

This unit also points out that while both ‘active’ and ‘passive’ revision strategies are followed by investors and portfolio managers, “passive’ strategy is followed by believers of market efficiency or those who lack portfolio analysis and selection skills and resources.

Major constraints, which come in the way of portfolio revision, are transaction costs, taxes, statutory stipulations and lack of ideal formula.

This unit also discusses and illustrates three formula plans of portfolio revision, namely, constant-dollar-value plan, constant-ratio plan and variable-ratio plan.

Before closing the discussion about formula plans, it is noted that these formula plans are not a royal road to riches.

They have their own limitations.

The choice of portfolio revision strategy or plan is, thus, no simple question.

The choice will involve cost benefit analysis.

No plan can be perfect to the extent that it would not need revision sooner or later.

Investment plans certainly are not.

In the context of portfolio management the need for revision is ever more because the financial markets are continually changing.

Thus the need for portfolio revision might simply arise because market witnessed some significant changes since the creation of the portfolio.

Further, the need for portfolio revision may arise because of some investor-related factors such as (i) availability of additional wealth, (ii) change in the risk attitude and the utility function of the investor, (iii) change in the investment goals of the investors, and (iv) the need to liquidate a part of the portfolio to provide funds for some alternative uses.

The other valid reasons for portfolio revision such as short-term price fluctuations in the market do also exist.

There are, thus, numerous factors, which may be broadly called market-related and investor related, which spell need for portfolio revision.


Constant Dollar Value Plan: An investment strategy designed to reduce volatility in which securities, typically mutual funds, are purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving.

Constant-ratio Plan: This is an investment strategy in which the portfolio's composition by asset class is maintained at a certain level through periodic adjustments.

Formula Plan: The buying and/or selling of securities according to a predetermined formula.

This approach to investment decisions is intended to eliminate the investor's emotions and instead to follow a mechanical set of rules.

Variable-ratio Plan: It is a more flexible variation of constant ratio plan.

Under the variable ratio plan, it is provided that if the value of aggressive portfolio changes by certain percentage or more, the initial ratio between the aggressive portfolio and conservative portfolio will be allowed to change as per the pre-determined schedule.

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