PORTFOLIO REVISION

VEENA R S 0905548

PORTFOLIO REVISION

The financial markets are continually changing. In the dynamic environment, a portfolio that was

optimal when constructed may not continue to be optimal with the passage of time.

It may have to be revised periodically so as to ensure that it continues to be optimal.

NEED FOR PORTFOLIO REVISION

It may arise because of some investor related factors

1. Change in risk tolerance

2. Change in the investment goals

3. Need to liquidate a part of the portfolio to provide funds for some alternative use

4. Availability of additional funds

MEANING

A portfolio is a mix of securities from a vast universe of securities.

Portfolio revision involves changing the existing mix of securities.

Changing the securities currently included in the portfolio Altering the proportion of funds invested in the securities. New securities may be added or some of them may be

removed from the portfolio.

Contd...

It leads to purchase and sales of securities. The objective is to maximize the return for a given

level of risk or minimize the risk for a given level of return.

It is process of adjusting the existing portfolio in accordance with the changes in financial market and investors position so as to ensure maximum return from the portfolio with minimum risk.

CONSTRAINTS

Transaction cost Taxes Statutory stipulations Intrinsic difficulty

PORTFOLIO REVISION STRATEGY

2 strategies Active revision strategy Passive revision strategyThe choice depends on the investors

objectives , skill, resources and time.

ACTIVE REVISION STRATEGY

Involves frequent and sometimes substantial adjustment to portfolio.

Investors believe that security markets are not continuously efficient and different investors have heterogeneous expectations.

The practitioners are confident of developing better estimates of the true risk and returns of the security than the rest of the market.

Thus the objective is to beat the market.

Contd..

Active revision is essentially carrying out analysis and selection all over again.

It is based on analysis of technical factors and fundamental factors.

Frequency of trading is much higher resulting in higher transaction cost.

PASSIVE REVISION STRATEGY Involves only minor and frequent

adjustment to the portfolio. The practitioners believe in market

efficiency and homogeneity of expectations among investors.

Adjustment to portfolio is carried out according to certain predetermined rules and procedures designated as formula plans.

FORMULA PLANS It represents an attempt to exploit the

price fluctuations in the market and make them a source of profit to the investor.

They make decisions of buying and selling securities.

It consist of a predetermined rule and these rules calls for specified action when there are changes in the securities market .

Contd..

It demands the investor to divide his investment funds to 2 portfolio Aggressive (equity shares) Defensive (bonds and debentures)

Different formula plans for implementing passive portfolio revision Constant rupee value Constant ratio plan Dollar cost average

Constant rupee plan Constructs 2 portfolio-aggressive&

defensive. The purpose is to keep the value of

aggressive portfolio constant When share value increases

aggressive portfolio increases To bring down aggressive portfolio

he has to sell some of his shares

Contd. When share price is falling the

aggressive portfolio would also decline To keep the value to the original the

investor has to buy some shares from market

For this a part of the defensive portfolio will be liquidated to raise the money needed to buy shares

To implement this plan the investor has to decide the action point.

Constant ratio plan Construct 2 portfolio The ratio between aggressive and

defensive portfolio would be predetermined as 1:1 or1.5:1 etc.

The purpose is to keep the ratio constant. When share price fluctuates the 2

portfolios are readjusted to keep the ratio constant.

A revision point will also have to be predetermined.

Dollar cost average It utilizes the cyclic movement in share

prices to construct a portfolio at low cost.

The plan stipulates the investor to invest a constant sum in a specified share at periodic intervals.

The periodic investment continues for a long period to cover a complete cycle of share price movements

Contd.. It is a technique of building up a

portfolio over a period of time. The plan does not envisage

withdrawal of funds from the portfolio in between.

This plan is suited for investors who have periodic sums to invest.