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

An investor follows a constant ratio plan with a 50:50 split between equity and bonds, rebalancing after every market move. The initial portfolio is Rs 10,00,000. Equity rises 20% and the plan is rebalanced. Equity then falls 20% while bonds remain unchanged, and the plan is rebalanced again. What is the amount of equity to be bought at the second rebalancing?

The investor buys Rs 55,000 of equity. After the first rebalance both sides are Rs 5.5 lakh, and equity then falls to Rs 4.4 lakh. The total is Rs 9.9 lakh, so the 50:50 target is Rs 4.95 lakh each, requiring Rs 55,000 of purchases.

  1. ARs 55,000Correct
  2. BRs 1,10,000
  3. CRs 44,000
  4. DRs 49,500

Explanation

Start: equity 5,00,000 and bonds 5,00,000. After the 20% rise: equity 6,00,000, total 11,00,000, so each side is 5,50,000 and equity of 50,000 is sold. After the 20% fall: equity 4,40,000, bonds 5,50,000, total 9,90,000, so the target is 4,95,000 each. Equity to buy = 4,95,000 - 4,40,000 = 55,000. Restoring equity to 5,50,000 (1,10,000) ignores that the total has fallen.

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