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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. She starts with ₹4,00,000 (₹2,00,000 in each). Equity then rises 25% with bonds unchanged, and the portfolio is rebalanced to 50:50. Next, equity falls 20% with bonds unchanged, and the portfolio is rebalanced to 50:50 again. How much equity is bought at the second rebalancing?

The investor buys ₹22,500 of equity at the second rebalancing. After the fall, equity is ₹1,80,000 and bonds ₹2,25,000, a total of ₹4,05,000. A 50:50 split requires ₹2,02,500 in each, so equity must be topped up by ₹22,500.

  1. A₹22,500Correct
  2. B₹45,000
  3. C₹25,000
  4. D₹20,250

Explanation

After the 25% rise, equity is 2,50,000 and bonds 2,00,000, so the total is 4,50,000. Rebalancing to 2,25,000 each means selling 25,000 of equity. After the 20% fall, equity is 1,80,000 and bonds 2,25,000, so the total is 4,05,000. The target is 2,02,500 each, so equity purchased = 2,02,500 - 1,80,000 = 22,500. The value 45,000 is the gap between the two holdings and would overshoot. The value 25,000 is the first rebalancing amount.

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