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

An investor follows a constant ratio plan with 50:50 split between equity and bonds, rebalancing when the equity share departs from the ratio. The portfolio is Rs 10,00,000 initially (Rs 5,00,000 each). Equity rises 20% while bonds stay unchanged. What action restores the plan?

Sell equity worth Rs 50,000 and buy bonds. After the rise, equity is Rs 6,00,000 and bonds Rs 5,00,000, total Rs 11,00,000. A constant 50:50 ratio needs Rs 5,50,000 in each, so the Rs 50,000 excess in equity is shifted to bonds.

  1. ASell equity worth Rs 50,000 and buy bondsCorrect
  2. BSell equity worth Rs 1,00,000 and buy bonds
  3. CBuy equity worth Rs 50,000 by selling bonds
  4. DSell equity worth Rs 60,000 and buy bonds

Explanation

Equity becomes Rs 6,00,000 and bonds Rs 5,00,000, total Rs 11,00,000. A 50:50 split needs Rs 5,50,000 in each. So equity worth Rs 50,000 is sold and bonds bought. Selling Rs 1,00,000 would overshoot to a bond-heavy mix.

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