Investment and Portfolio Management

UNIT-V-Portfolio Management Process

Portfolio Management
Portfolio Management is defined as the art and science of making decisions about the
investment mix and policy, matching investments to objectives, asset allocation for individuals
and institutions, and balancing risk against performance. It is mainly concerned with
allocating assets while downsizing risk.

“Never put all your eggs in one basket” is what is meant by diversification. Instead of investing
all funds in one asset, the funds be invested in a group of assets.

Diversification helps in reducing the risk of investing. The total risk of one investment is the
sum of the impact of all the factors that might affect the return from that investment. However,
investors need not suffer risk inherent with individual investments as it could be reduced by
holding a diversity of investments.

For example, return from a single investment in a cold drink company is subject to weather
conditions. This investment is a risky investment. However, if a second investment can be
made in an umbrella company, which is also subject to weather changes, but in the opposite
way, the return from the portfolio of two investments will have a reduced risk-level. This
process is known as diversification.

Portfolio is the combination of securities or diversified investment in securities.

Portfolio management may be defined as the process of construction, maintenance, revision

and evaluation of a portfolio.

The objective of portfolio management is to build a portfolio which gives a return

commensurate with the risk preference of the investor.

Portfolio management specifically deals with security analysis, analysis and selection of
portfolio, revision of portfolio and evaluation of portfolio.
Objectives of Portfolio Management
a) Capital appreciation
b) Maximising returns on investment
c) To improve the overall proficiency of the portfolio
d) Risk optimisation
e) Allocating resources optimally
f) Ensuring flexibility of portfolio
g) Protecting earnings against market risks

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Who is a Portfolio Manager ?
An individual who understands the client’s financial needs and designs a suitable investment
plan as per his income and risk taking abilities is called a portfolio manager. A portfolio
manager is one who invests on behalf of the client.

A portfolio manager counsels the clients and advises him the best possible investment plan
which would guarantee maximum returns to the individual.

A portfolio manager must understand the client’s financial goals and objectives and offer a
tailor made investment solution to him. No two clients can have the same financial needs.

Types of Portfolio Management

Active portfolio management

In this type of management, the portfolio manager is mostly concerned with generating
maximum returns. Resultantly, they put a significant share of resources in the trading of
securities. Typically, they purchase stocks when they are undervalued and sell them off when
their value increases.

Passive portfolio management

This particular type of portfolio management is concerned with a fixed profile that aligns
perfectly with the current market trends. The managers are more likely to invest in index
funds with low but steady returns which may seem profitable in the long run.

Discretionary portfolio management

In this particular management type, the portfolio managers are entrusted with the authority to
invest as per their discretion on investors’ behalf. Based on investors’ goals and risk appetite,
the manager may choose whichever investment strategy they deem suitable.
Non-discretionary management

Under this management, the managers provide advice on investment choices. It is up to

investors whether to accept the advice or reject it. Financial experts often recommended
investors to weigh in the merit of professional portfolio managers’ advice before disregarding
them entirely.

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 Who Should Opt for Portfolio Management?

The following should consider portfolio management –

a) Investors who intend to invest across different investment avenues like bonds, stocks, funds,
commodities, etc. but do not possess enough knowledge about the entire process.
b) Those who have limited knowledge about the investment market.
c) Investors who do not know how market forces influence returns on investment.

d) Investors who do not have enough time to track their investments or rebalance their
investment portfolio.

Portfolio Management Process

Typically, professionals use these following ways to manage investment portfolio –

Asset allocation

Essentially, it is the process wherein investors put money in both volatile and non-volatile
assets in such a way that helps generate substantial returns at minimum risk. Financial experts
suggest that asset allocation must be aligned as per investor’s financial goals and risk appetite.

Diversification

The said method ensures that an investors’ portfolio is well-balanced and diversified across
different investment avenues. On doing so, investors can revamp their collection significantly
by achieving a perfect blend of risk and reward. This, in turn, helps to cushion risks and
generates risk-adjusted returns over time.

Rebalancing

Rebalancing is considered essential for improving the profit-generating aspect of an

investment portfolio. It helps investors to rebalance the ratio of portfolio components to yield
higher returns at minimal loss. Financial experts suggest rebalancing an investment portfolio
regularly to align it with the prevailing market and requirements.
Once investors have selected a suitable strategy, they must follow a thorough process to
implement the same so that they can improve the portfolio’s profitability to a great extent.

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Portfolio Risk and Return
i. Portfolio Return:

The expected return of a portfolio represents weighted average of the expected returns on
the securities comprising that portfolio with weights being the proportion of total funds
invested in each security (the total of weights must be 100).

The following formula can be used to determine expected return of a portfolio:

Calculation of Portfolio Return

Computation of Portfolio Return:

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ii. Portfolio Risk:

Unlike the expected return on a portfolio which is simply the weighted average of the
expected returns on the individual assets in the portfolio, the portfolio risk, σp is not the
simple, weighted average of the standard deviations of the individual assets in the
portfolios. \

It is for this fact that consideration of a weighted average of individual security deviations
amounts to ignoring the relationship, or covariance that exists between the returns on
securities. In fact, the overall risk of the portfolio includes the interactive risk of asset in
relation to the others, measured by the covariance of returns. Covariance is a statistical
measure of the degree to which two variables (securities’ returns) move together. Thus,
covariance depends on the correlation between returns on the securities in the portfolio.

Computation of Portfolio Risk

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PORTFOLIO SELECTION

Risk and return are two basic factors for construction of a portfolio. While constructing a
portfolio, an investor wants to maximize the return and to minimize the risk. The risk can be
reduced by diversification. A portfolio which has highest return and lowest risk is termed as
an optimal portfolio. The process of finding an optimal portfolio is known as the portfolio
selection.

If the investments can be made with certainty of returns, then the returns from different
investments would be the only consideration for making portfolio. However, in case of
uncertainty, decision regarding investments cannot be made only on the basis of returns. Risk
(uncertainty) should also be considered. The following are the theoretical relationship
between the risk and return and can be used to construct a portfolio.

A. Traditional Theories

▪ Markowitz model
▪ Sharpe Single Index Model
B. Modern Portfolio theories

▪ Capital Asset Pricing Model ( CAPM)

▪ Arbitrage Pricing Theory (APT)

Markovitz Portfolio theory

Traditional model
Markowitz's theory is regarding maximizing the return investors could get in their investment
portfolio considering the risk involved in the investments. MPT asks the investor to consider
how much the risk of one investment can impact their entire portfolio.

HarryMar. In his1952 paper published by The Journal of Finance, he first proposed the
theory as a means to create and construct a portfolio of assets to maximize returns within a
given level of risk, or to devise one with a desired, specified, and expected level of return
with the least amount of risk. Markowitz theorized that investors could design a portfolio to
maximize returns by accepting a quantifiable amount of risk.In other words, investors could
reduce risk by diversifying their assets and asset allocation of their investments using a
quantitative method. MPT is a mathematical justification for asset allocation within a
portfolio, as it amounts to a weighted average of the expected returns on individual assets.

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To begin with, Markowitz assumed that most investors are risk-averse. That means they
are more personally comfortable with less risk, and nervous and anxious with increased risk.
This also translates into the belief that it is better to not lose money than to find or gain it. So,
given a choice between a higher return possibility with greater risk, and a lower return
possibility with less risk, most people will naturally prefer the portfolio with the least risk,
even if it means a lower return.

This gets to the heart of Markowitz's theory. Given two portfolios, an investor will naturally
prefer one that indicates the highest return possibility with the least risk.

Efficient Frontier

The Efficient Frontier is the set of optimal portfolios that offer the highest expected return
for a defined level of risk or the lowest risk for a given level of expected return.

Portfolios that lie below the efficient frontier are sub-optimal because they do not provide
enough return for the level of risk. The Efficient Frontier arising from a feasible set of
portfolios of risky assets is concave in shape.

The efficient frontier is curved because there is a diminishing marginal return to risk. Each
unit of risk added to a portfolio gains a smaller and smaller amount of return.When an
investor is assumed to use riskless lending and borrowing in his investment activity the shape
of the efficient frontier transforms into a straight line.

Fig.22

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Sharpe Single Index Model

The Single-Index Model (SIM) is a simple asset pricing model to measure both the risk and
the return of a stock. The model has been developed by William Sharpe in 1963.

Markowitz Model had serious practical limitations due to the rigors involved in compiling
the expected returns, standard deviation, variance, covariance of each security to every other
security in the portfolio.
Sharpe Model has simplified this process by relating the return in a security to a single Market
Index. Firstly, this theoretically reflects all well-traded securities in the market. Secondly, it
reduces and simplifies the work involved in compiling elaborate matrices of variances
as between individual securities.

Thus, if the Market Index is used as a surrogate for other individual securities in the portfolio,
the relation of any individual security with the Market Index can be represented in a
Regression line or characteristic line.

This optimal portfolio of Sharpe is called the Single Index Model. The method involves
selecting a cut-off rate for inclusion of securities in a portfolio. For this purpose, excess return
to Beta ratio given above has to be calculated for each stock and rank them from highest to
lowest.

The Simple Index Model is based on the following

assumptions:

• Most stocks have a positive covariance because they all respond similarly to
macroeconomic factors.

• However, some firms are more sensitive to these factors than others, and this firm-
specific variance is typically denoted by its beta (β), which measures its variance
compared to the market for one or more economic factors.

• Co-variances among securities result from differing responses to macroeconomic

factors.

Hence, the covariance of each stock can be found by multiplying their betas and the
market variance

Capital Assets Pricing Model

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The Capital Asset Pricing Model (CAPM) was developed in mid-1960s by three
researchers William Sharpe, John Lintner and Jan Mossin independently. Consequently, the
model is often referred to as Sharpe-Lintner-Mossin Capital Asset Pricing Model.

The Capital Asset Pricing Model (CAPM) is a relationship explaining how assets should
be priced in the capital markets. It gives the nature of the relationship between the expected
return and the systematic risk of a security.

The relationship between risk and return established by the Security Market Line (SML)
is known as the Capital Asset Pricing Model. It is basically a simple linear relationship. The
higher the value of beta, higher would be the risk of the security and therefore, larger would
be the return expected by the investors.

In other words, all securities are expected to yield returns commensurate with their riskiness.
This relationship is valid not only for individual securities but is also valid for all portfolios
whether efficient or inefficient. The expected return on any security or
portfolio can be determined from the CAPM formula if we know the beta of that security
or portfolio.

The specific assumptions underlying Capital Asset Pricing Model are:

1) Investors make decisions based solely upon risk-and-return assessments. These

judgments take the form of expected values and standard deviation measures.

2) The purchase or sale of a security can be undertaken in infinitely divisible units.

Investors can short sell any amount of shares without limit.

3) Purchases and sales by a single investor cannot affect prices i.e. there is
perfect
competition where investors in total determine prices by their actions. Otherwise,
monopoly power could influence prices (returns).

4) There are no transaction costs. Where there are transaction costs, returns would
be sensitive to whether the investor owned a security before the decision period.

5) The purchase or sale of securities is done in the absence of personal income taxes i.e.
investors are indifferent to the form in which the return is received (dividends or
capital gains).

6) The investor can borrow or lend any amount of funds desired at an identical riskless
rate

(example: the Treasury bill

rate).

7) Investors share identical expectations with regard to the relevant decision period, the
necessary decision inputs, their form and size. Thus investors are presumed to have
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 identical planning horizons and to have identical expectations regarding expected
returns, variances of expected returns, and covariances of all pairs of securities.
Otherwise, there would be a family of efficient frontiers because of differences in
expectations.

CAPM describes the expected return for all assets and portfolios of assets in the
economy. The difference in the expected returns of any two assets can be related to
the difference in their betas. The model postulates that systematic risk is the only
important ingredient in determining expected return. As investors can eliminate
all unsystematic risk through diversification, they can be expected to be rewarded
only for bearing systematic risk. Thus, the relevant risk of an asset is its systematic
risk and not the total risk.

The CAPM lets investors quantify the expected return on investment given the risk,
risk- free rate of return, expected market return, and the beta of an asset or
portfolio. The Arbitrage Pricing Theory is an alternative to the CAPM that uses
fewer assumptions and can be harder to implement than the CAPM.
The CAPM has serious limitations in real world, as most of the assumptions,
are unrealistic. Many investors do not diversify in a planned manner. Besides,
Betacoefficient is unstable, varying from period to period depending upon the method
of compilation. They may not be reflective of the true risk involved.

Characteristic Lines

1) Capital Market Line (CML): It is the graph of the required return and risk (as measured
by standard deviation) of a portfolio of a risk-free asset and a basket of risky assets
that offers the best risk-return trade-off.

Fig.23

All investors are assumed to have identical (homogeneous) expectations. Hence, all of
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 them will face the same efficient frontier. Every investor will seek to combine the same
risky portfolio with different levels of lending or borrowing according to his desired level
of risk. Because all investors hold the same risky portfolio, then it will include all risky
securities in the market. This portfolio of all risky securities is referred to as the market
portfolio M. Each security will be held in the proportion which the market value of
the security bears to the total market value of all risky securities in the market. All
investors will hold combinations of only two assets, the market portfolio and a riskless
security. All these combinations will lie along the straight line representing the efficient
frontier.

This line formed by the action of all investors mixing the market portfolio with the risk
free asset is known as the capital market line (CML). All efficient portfolios of all
investors will lie along this capital market line.

The CML provides a risk return relationship and a measure of risk for efficient portfolios.
The appropriate measure of risk for an efficient portfolio is the standard deviation of
return of the portfolio. There is a linear relationship between the risk as measured by the
standard deviation and the expected return for these efficient portfolios.

CML shows the risk-return relationship for all efficient portfolios. They would all lie
along the capital market line. All portfolios other than the efficient ones will lie below
the capital market line. The CML does not describe the risk-return relationship of
inefficient portfolios or of individual securities.

2) Security Market Line (SML): It is a line drawn on a chart that serves as a graphical
representation of the Capital Asset Pricing Model (CAPM), which shows different levels
of systematic, or market, risk of various marketable securities plotted against the
expected return of the entire market at a given point in time.

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 Fig.24

The Capital Asset Pricing Model specifies the relationship between expected return and
risk for all securities and all portfolios, whether efficient or inefficient. The total risk of a
security as measured by standard deviation is composed of two components: systematic
risk and unsystematic risk or diversifiable risk. As an investment is diversified and more
and more securities are added to a portfolio, the unsystematic risk is reduced. For
a very well diversified portfolio, unsystematic risk tends to become zero and the only
relevant risk is systematic risk measured by beta. Hence, it is argued that the correct
measure of a security’s risk is beta.It follows that the expected return of a security or of a
portfolio should be related to the risk of that security or portfolio as measured by Beta
which is a measure of the security’s sensitivity to changes in market return.

Beta value greater than one indicates higher sensitivity to market changes, whereas
beta value less than one indicates lower sensitivity to market changes. A value of one
indicates that the security moves at the same rate and in the same direction as the market.

It is necessary to contrast SML and CML. Both postulate a linear (straight line) relationship
between risk and return.

1) In CML the risk is defined as total risk and is measured by standard deviation, while in
SML the risk is defined as systematic risk and is measured by beta.

2) Capital market line is valid only for efficient portfolios while security market line is
valid for all portfolios and all individual securities as well.

3) CML is the basis of the Capital Market Theory while SML is the basis of the Capital
Asset

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 Pricing Model.

Optimum Portfolio

An Optimal Portfolio is one that minimizes your risk for a given level of return or maximizes
your return for a given level of risk. The optimal portfolio concept falls under the portfolio
theory. The theory assumes that investors fanatically try to minimize risk while striving for
the highest return.

Optimal portfolio is a term used in portfolio theory to refer to the one portfolio on the Efficient
Frontier with the highest return-to-risk combination given the specific investor's tolerance for
risk. It's the point where the Efficient Frontier (supply) and the Indifference Curve (demand)
meet.

Limitations of CAPM:

1. Beta calculation difficult (tedious).

2. Assumptions are hypothetical and impractical.

3. The required rate of return is only a rough approximation.

Arbitrage Pricing Theory

The arbitrage pricing theory is a model used to estimate the fair market value of a financial asset
on the assumption that an assets expected returns can be forecasted based on its linear pattern or
relationship to several macroeconomic factors that determine the risk of the specific asset. The
theory deals with specifically financial assets such as bonds, stocks, derivatives, commodities, and
currencies. Arbitrage generally refers to the act of exploiting the price differences in a financial
asset in different markets to make profits by simultaneously purchasing at a low price in one market
and selling the same asset at a higher price in a different market. It is generally considered a risk-
free investment. The person who tries to profit from such arbitrage opportunity due to price
imbalance is called an arbitrageur. However, in the context of arbitrage pricing theory, arbitrage
involves trading in the same market, and it is not necessarily a risk-free operation but it does offer
a high probability of success. Also, it may involve trading in two different assets where an investor
sells one asset that is overvalued as per the theory to buy another that is viewed undervalued. We
shall discuss the arbitrage pricing model in detail to understand better how it works.

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It takes a great amount of research to determine the level of sensitivity to changes in each
macroeconomic factor. Selecting a macroeconomic factor to use in the calculation of an assets
returns depends on several characteristics that the factor should manifest including: 1) Have
unexpected movements which subsequently impact on an asset price. 2) Their influence cannot be
easily mitigated as they carry systemic risk. 3) The information available concerning
macroeconomic factors should be timely and accurate. 4) Their influence and risks to a financial
asset can theoretically be proven on economic grounds.

Formula: E(rj) = rf + 1*RP1 + 2*RP2 + .. + n*RPn

Representation:

E(rj) - Expected return on the financial asset j

rf - Risk-free rate of return

n - The level of volatility or sensitivity of an assets price with respect to changes by macroeconomic
factor n

RPn Risk premium of macroeconomic factor n

PORTFOLIO EVALUATION

Portfolio evaluation is the process of measuring and comparing the returns (actually)
earned on a portfolio with returns (estimates) for a benchmark.

Evaluation factors:

1. Risk-return Trade-off:

The performance evaluation should be based on risk and return not on either of them.
Risk without return and return without risk level are impossible to be interpreted.
Investors are risk averse. But it does not mean that they are not ready to assume risk.
They are ready to take risks provided the return is commensurate. So, in the portfolio
performance evaluation, risk-return trade-off be taken care of.

2. Appropriate Market Index: The performance of one portfolio is benchmarked

either against some other portfolio (for comparative position) or against some market

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 index.

3. Common Investment Time Horizon:

The investment period horizon of the portfolio being evaluated, and the time horizon of
the benchmark must be same. Suppose a mutual fund scheme announces that it has earned
the highest return, it must be verified before accepting whether the highest return has been
earned during the current year or during last 3 years or 5 years, etc.

4. Objectives or Constraints of Portfolio:

The objectives for which the portfolio has been created has to be evaluated.

Measures of Portfolio
Performance:

There are several measures for evaluation of portfolio performance. They are

I. Return per unit of

risk:

The return earned over and above the risk-free return is the risk-premium and is earned
for bearing risk. The risk-premium may be divided by risk factor to find out the reward
per unit of risk undertaken. This is also known as reward to risk ratio. There are two
methods of measuring reward to risk ratio:

a) Sharpe Ratio (Reward to Variability Ratio) :

The Sharpe Index measures the risk premium of the portfolio relative to the total amount
of risk in the portfolio. The larger the index value, the better the portfolio has performed.

RP – IRF

Sharpe Ratio = ------------

b) Treynor Ratio(Reward to Volatility

Ratio):

The Treynor Index measures the risk premium of the portfolio related to the amount of
systematic risk present in the portfolio.

RP – IRF

Treynor Ratio = -----------

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 II. Differential Return:

Jensen Ratio:
Michel Jensen has developed another method for evaluation of performance of a portfolio.
This measure is based on differential returns. The Jensen’s Ratio is based on the difference
between the actual return of a portfolio and required return of a portfolio in view of the risk of the
portfolio.
The formula is broken down as follows:
Jenson’s Alpha= PR-CAPM Where
PR= Portfolio Return
CAPM= Risk free rate+ ( Return of market risk free rate of return)

Revision of Portfolio

Different Types of Formula Plans are given below:

1.Constant-Rupee-Value Plan:
The constant rupee value plan specifies that the rupee value of the stock portion of the
portfolio will remain constant. Thus, as the value of the stock rises, the investor must
automatically sell some of the shares to keep the value of his aggressive portfolio constant.
If the price of the stock falls, the investor must buy additional stock to keep the value of
aggressive portfolio constant.
By specifying that the aggressive portfolio will remain constant in money value, the plan also
specifies that remainder of the total fund be invested in the conservative fund. The constant-
rupee -value plan’s major advantage is its simplicity. The investor can clearly see the amount
that he needed to have invested.

However, the percentage of his total fund that this constant amount will represent in the
aggressive portfolio will remain at different levels of his stock’s values, investor must choose
predetermined action points sometimes called revaluation points, action points are the times

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at which the investor will make the transfers called for to keep the constant rupee value of the
stock portfolio.
Of course, the portfolio’s value cannot be continuously the same, since this would necessitate
constant attention by the investor, innumerable action points, and excessive transaction costs.
In fact, the portfolio will have to be allowed to fluctuate to some extent before action is taken
to readjust its value.

The action points may be sent according to prespecified periods of time, percentage changes
in some economic or market index, or – mostly ideally – percentage changes in the value of
the aggressive portfolio.
The timing of action points can have an important effect on the profits the investor obtains.
Action points placed dose together cause excessive costs that reduce profits.
If the action points are too far apart, however, the investor may completely miss the
opportunity to profit from fluctuations that take place between them.

Main limitation of the constant rupee value plan is that it requires some initial forecasting.
However, it does not require forecasting the extent to which upward fluctuations may reach.
In fact, a forecast of the extent of downward fluctuations is necessary since the conservative
portfolio must be large enough so that funds are always available for transfer to the stock
portfolio as its value shrinks. This step requires knowledge of how stock prices might go.
Then the required size of the conservative portfolio can be determined if the investor can start
his constant rupee fund when the stocks, he is acquiring are not priced too far above the lowest
values to which they might fluctuate, he can obtain better overall results from a constant-
rupee- value plan.

Advantages of Constant Rupee Value Plan

The constant rupee value plan offers the following
advantages.
1. It is very simple to operate. The investor need not make any.
complicated calculations.
2. This plan brings funds to the investor for investment.

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3. Constant rupee value plan specifies the percentage of the aggressive portfolio for the
investment fund. Specified as a percentage of the total fund, the aggressive portfolio will have
a constant amount.
Constant Ratio Plan
2. Constant Ratio Plan:
The constant ratio plan goes one step beyond the constant rupee plan by establishing a fixed
percentage relationship between the aggressive and defensive components. Under both plans
the portfolio is forced to sell stocks as their prices rise and to buy stocks as their prices fall.
Under the constant ratio plan, however, both the aggressive and defensive portions remain in
constant percentage of the portfolio’s total value. The problem posed by re- balancing may
mean missing intermediate price movements.
The constant ratio plan holder can adjust portfolio balance either at fixed) intervals or when
the portfolio moves away from the desired ratio by a fixed percentage.
How do constant ratio plan work?
Constant ratio plan works as follows:
1. When the value of stock rises, it must be sold to make it constant with the value of the
conservative portfolio. When the value of stock falls, the investor should transfer funds to
common stock.
2. The investor should keep the aggressive value constant of the portfolio’s total value. When
the price of stock falls, the investor should transfer from conservative to aggressive value.
3. The investor need not forecast the lower levels at which the prices
fluctuate.
4. The core of constant ratio plan lies in the purchase of stock in less
aggressive manner as the prices falls.
5. When the stock prices rise, sale of stock is affected in less aggressive
manners.

6. The sales and purchase of aggressive stock depend upon the middle range of fluctuations.
If the fluctuations in prices are just above the middle range of sales, it is regarded as the most
aggressive point. Likewise, if the fluctuations are just below the middle range, it is identified
as the least aggressive.

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7. When the stock prices fluctuate above the middle range of fluctuations, shares are sold
aggressively. Similarly, when the stock prices fluctuate below the middle range of
fluctuations, shares are bought aggressively.
8. When there is a continuous and sustained rise or fall in share
prices, the investor will make enormous profit.

The advantage of the constant ratio plan is the automatism with which it forces the manager
to adjust counter cyclically his portfolio. This approach does not eliminate the necessity of
selecting individual securities, nor does it perform well if the prices of the selected securities
do not move with the market.
The major limitation for the constant ratio plan, however, is the use of bonds as a haven stocks
and bonds are money and capital market instruments, they tend to respond to the same interest
rate considerations in the present discounted evaluation framework.
This means, at times, they may both rise and decline in value at approximately the same time.
There is a limited advantage to be gained from shifting out of the rising stocks into the bonds
if, in the downturn, both securities prices decline.
If the decline in bond prices is of the same magnitude as those in stock prices, most, if not all,
of the gains from the constant ratio plan are eliminated. If the constant ratio plan is used, it
must be coordinated between securities that do not tend to move simultaneously in the same
direction and in the same magnitude.

3. Variable Ratio Plan:

Instead of maintaining a constant rupee amount in stocks or a constant ratio of stocks to bonds,
the variable ratio plan user steadily lowers the aggressive portion of the total portfolio as stock
prices rise, and steadily increase the aggressive portion as stock prices fall.
By changing the proportions of defensive aggressive holdings, the investor is in effect buying
stock more aggressively as stock prices fall and selling stock more aggressively as stock prices
rise.

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