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CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision

An investor follows a constant ratio plan, keeping aggressive (equity) and conservative (debt) portfolios in a 50:50 ratio and rebalancing whenever the ratio moves. The initial fund of ₹10,00,000 was split ₹5,00,000 each. Later the equity portfolio rose to ₹7,00,000 while the debt portfolio stayed at ₹5,00,000. What action does the plan require?

The plan requires selling equity worth ₹1,00,000 and shifting it to debt. After the rise, the total fund is ₹12,00,000, so a 50:50 split needs ₹6,00,000 in each. Equity stands at ₹7,00,000, which is ₹1,00,000 above the target.

  1. ASell equity worth ₹2,00,000 and buy debt
  2. BBuy equity worth ₹1,00,000 using debt
  3. CMake no transaction until equity doubles
  4. DSell equity worth ₹1,00,000 and buy debtCorrect

Explanation

Total value is ₹12,00,000, so a 50:50 ratio needs ₹6,00,000 in each portfolio. Equity is ₹1,00,000 above target, so sell ₹1,00,000 of equity and add it to debt. Selling ₹2,00,000 would restore equity to the original ₹5,00,000 and ignore that the total fund has grown.

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