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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Construction Process

Ms. Kapoor, 30, has a target allocation of 70% equity and 30% debt on a Rs 20 lakh portfolio. After a market rally, equity is worth Rs 16 lakh and debt Rs 4 lakh. To return to the target allocation by rebalancing, what should she do?

She should sell Rs 2 lakh of equity and buy Rs 2 lakh of debt. On a Rs 20 lakh portfolio the 70:30 target means Rs 14 lakh equity and Rs 6 lakh debt, while she holds Rs 16 lakh and Rs 4 lakh respectively.

  1. ASell equity worth Rs 2 lakh and buy debt worth Rs 2 lakhCorrect
  2. BSell equity worth Rs 4 lakh and buy debt worth Rs 4 lakh
  3. CSell debt worth Rs 2 lakh and buy equity worth Rs 2 lakh
  4. DSell equity worth Rs 1 lakh and buy debt worth Rs 1 lakh

Explanation

Total value is Rs 20 lakh. Target equity is 70% = Rs 14 lakh and target debt 30% = Rs 6 lakh. Equity is Rs 2 lakh overweight and debt Rs 2 lakh underweight, so shift Rs 2 lakh from equity to debt. Selling Rs 4 lakh would overshoot the target.

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