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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 and rebalances after every move. She starts with Rs 10,00,000. Equity first rises by 20% and she rebalances. Equity then falls by 20% and she rebalances again. How much equity does she buy at the second rebalancing?

She buys Rs 55,000 of equity. After the first rebalance both holdings are Rs 5,50,000. The 20% fall makes equity Rs 4,40,000 and the total Rs 9,90,000, so the 50:50 target is Rs 4,95,000 each, needing Rs 55,000 more equity.

  1. ARs 55,000Correct
  2. BRs 1,10,000
  3. CRs 50,000
  4. DRs 45,000

Explanation

After the rise: equity 6,00,000, bonds 5,00,000, total 11,00,000. Rebalance to 5,50,000 each. After the 20% fall, equity is 4,40,000, bonds 5,50,000, total 9,90,000. The target is 4,95,000 each, so she buys equity worth 55,000. Rs 1,10,000 wrongly restores equity to the full 5,50,000. Rs 50,000 is the amount sold at the first rebalancing.

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