Page 338 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 14: Portfolio Revision

more because the financial markets are continually changing. Thus the need for portfolio revision Notes
might simply arise because the market witnessed some significant changes since the creation of
the portfolio. Further, the need for portfolio revision may arise because of some investor-
related factors such as
1. Availability of additional wealth,

2. Change in the risk attitude and the utility function of the investor,
3. Change in the investment goals of the investors and
4. The need to liquidate a part of the portfolio to provide funds for some alternative uses.
The other valid reasons for portfolio revision such as short-term price fluctuations in the
market do also exist. There are, thus, numerous factors, which may be broadly called
market related and investor-related, which spell need for portfolio revision.

14.2 Portfolio Revision Strategies

As are there numerous factors motivating revision of portfolio, so are there numerous strategies
of portfolio revision. Broadly speaking, investors may, depending on their investment objectives,
skill and resources, follow active or passive strategies for portfolio revision. Active strategy of
portfolio revision involves a process similar to portfolio analysis and selection, which is based
on an analysis of fundamental factors covering economy, industries and companies as well as
technical factors.
An active revision strategy seeks “beating the market by anticipating” or reacting to the perceived
events or information. Passive revision strategy, on the other hand, seeks ‘performing as the
market.’ The followers of active revision strategy are found among believers in the ‘market
inefficiency’, whereas passive revision strategy is the choice of believers in ‘market efficiency.’
The frequency of trading transaction, as is obvious, will be more under active revision strategy
than under passive revision strategy and so will be the time, money and resources required for
implementing active revision strategy than for passive revision strategy. In other words, active
and passive revision strategies differ in terms of purpose, process and cost involved. The choice
between the two strategies is certainly not very straightforward. One has to compare relevant
costs and benefits. On the face of it, active revision strategy might appear quite appealing but in
actual practice, there exist a number of constraints in undertaking portfolio revision itself.
1. Portfolio Revision Practices: In the US, both active and passive portfolio revision strategies
have been prevalent. Studies about portfolio revision strategies followed by US investors
show that the efficient market hypothesis is slowly but continuously gaining believers
and these converts revise their portfolio much less often than they were doing previously
because of their rising faith in market efficiency. Institutional investors in the US, on the
other hand, have shown a definite tendency in the recent past for active revision of their
portfolios. This is reportedly motivated by their desire to achieve superior performance
by frequent trading to take advantage of their supposedly superior investment skills.
Some research studies undertaken in the US about the market timing and portfolio revision
suggested as follows:
F. Black (1973) found that monthly and weekly revision could be rewarding strategy.
Though when transactions costs were considered, the results were less impressive, but of
course, still significantly positive.

H.A. Latane et al. (1974) concluded that complete portfolio revision every six months
would have been a rewarding strategy.

LOVELY PROFESSIONAL UNIVERSITY 333