CA Final · Advanced Financial Management · Portfolio Management
Rohit follows a constant-mix strategy of 60% equity and 40% debt on a ₹10,00,000 portfolio. After a market move, equity falls by 20% and debt rises by 5%. To restore the 60:40 mix, what action should he take?
He should buy equity worth ₹60,000 funded by selling debt. After the moves equity is ₹4.8 lakh and debt ₹4.2 lakh, a total of ₹9 lakh. A 60% equity target is ₹5.4 lakh, so ₹60,000 must shift from debt to equity.
- ABuy equity worth ₹60,000 by selling debtCorrect
- BBuy equity worth ₹1,20,000 by selling debt
- CSell equity worth ₹60,000 and buy debt
- DBuy equity worth ₹30,000 by selling debt
Explanation
Equity = 6,00,000 × 0.80 = ₹4,80,000. Debt = 4,00,000 × 1.05 = ₹4,20,000. Total = ₹9,00,000. Target equity = 60% × 9,00,000 = ₹5,40,000, so he buys ₹60,000 of equity by selling the same amount of debt. Restoring equity to its original ₹6,00,000 (a ₹1,20,000 purchase) ignores the fall in total value.
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