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

Mrs. Iyer follows a constant ratio plan with a 50:50 split between equity and bonds. She starts with Rs 5,00,000 in each. Equity rises 20% while bonds stay unchanged at Rs 5,00,000. To restore the 50:50 ratio, what transaction is required?

She must sell equity worth Rs 50,000 and buy bonds worth Rs 50,000. After the rise, equity is Rs 6,00,000 and bonds Rs 5,00,000, totalling Rs 11,00,000. A constant 50:50 ratio requires Rs 5,50,000 in each asset, so the excess equity of Rs 50,000 moves into bonds.

  1. ASell equity worth Rs 50,000 and buy bonds worth Rs 50,000Correct
  2. BSell equity worth Rs 1,00,000 and buy bonds worth Rs 1,00,000
  3. CBuy equity worth Rs 50,000 by selling bonds
  4. DNo transaction as the plan acts only on a fall in equity prices

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 worth Rs 50,000 bought. Selling Rs 1,00,000 would overshoot by restoring only the original equity value without considering the larger total.

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