Portfolio Revision

Need for Portfolio Revision

 Availability of additional funds for investments
 Change in risk tolerance
 Change in investment goals
 Need to liquidate a part of the portfolio to provide

funds for some alternative use

Meaning of Portfolio
 Portfolio revision involves changing existing
mix of securities. This can be done by
changing the securities currently included in
portfolio or by altering the proportion of funds
invested in securities.
 Portfolio revision leads to purchases & sales of

securities
 Objective of portfolio revision is to maximizing

the return for a given level of risk or

minimization the risk for the given level of
return
Constraints on Portfolio Revision
 Transaction Cost
 Taxes
 Statutory Stipulation
 Intrinsic Difficulty
Portfolio Revision Strategies
1. Active Revision Strategy
2. Passive Revision Strategy
1. Active Revision Strategy : This involves frequent
& substantial adjustments to the portfolio. They
hope to use their best estimates to excess
returns. The frequency of trading is likely to be
much higher resulting in higher transaction
cost.
2. Passive Revision Strategy : it involves only
minor & infrequent adjustments to the portfolio
over time. Under this, adjustment to portfolio is
carried according to predetermined rules &
procedures designated as formula plans.
 Formula Plans
 Formula plans consists of predetermined rules
regarding when to buy or sell & how much to buy or
sell. These predetermined rules call for specified
actions when there are changes in the securities
market.
 In this, the investor divide his investment funds into 2

portfolios i.e. one aggressive(portfolio consists of

equity shares) & other conservative or defensive
( bonds & debentures).
 The formula plans specify predetermined rules for the

transfer of funds from aggressive portfolio to the

defensive portfolio & vice versa. These rules enable the
investors to automatically sell shares when their prices
are rising & buy shares when their prices are falling.
Different formula plans
1. Constant Rupee Value Plan
2. Constant Ratio Plan
3. Dollar Cost Averaging
Basic Rules for Formula plans
1) Formula plans require the investor to divide his
investment funds in two portfolios i.e. aggressive
& Conservative (defensive),
2) The volatility of aggressive portfolio must be
greater than that of conservative portfolio, the
larger the difference between the two, the
greater the profits the formula plan can yield. 
3) The conservative (defensive) portfolio must
include high- grade bonds having a high degree
of safety and stability of the returns.
4) The conservative portfolio tends to decline
during periods of prosperity, owing to falling
interest rates. While the stock prices are rising,
therefore, the aggressive portfolio also rises.
5.The basic premise of formula plans is that
stock and bond prices of the portfolios move in
opposite direction. If they move in same
direction then this phenomenon certainly
impairs profitability of the formula plans.
6. The formula plans do not deal with the
selection of stocks or bonds.