Page 347 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Security Analysis and Portfolio Management

Notes
Questions
1. Is a stock that quotes at a lower PE always a better buy? Why/why not?

2. When we buy a share, we actually buy a share of the net profit of the company. On
what does this profit depend?

14.4 Summary

The portfolio revision strategies adopted by investors can be broadly classified as ‘active’
and ‘passive’ revision strategies.
This unit also points out that while both ‘active’ and ‘passive’ revision strategies are
followed by investors and portfolio managers, “passive’ strategy is followed by believers
of market efficiency or those who lack portfolio analysis and selection skills and resources.
Major constraints, which come in the way of portfolio revision, are transaction costs,
taxes, statutory stipulations and lack of ideal formula.
This unit also discusses and illustrates three formula plans of portfolio revision, namely,
constant-dollar-value plan, constant-ratio plan and variable-ratio plan.
Before closing the discussion about formula plans, it is noted that these formula plans are
not a royal road to riches.

They have their own limitations.
The choice of portfolio revision strategy or plan is, thus, no simple question. The choice
will involve cost benefit analysis.

No plan can be perfect to the extent that it would not need revision sooner or later.
Investment plans certainly are not.
In the context of portfolio management the need for revision is ever more because the
financial markets are continually changing. Thus the need for portfolio revision might
simply arise because 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 (i) availability of additional wealth, (ii) change in the risk attitude and the utility
function of the investor, (iii) change in the investment goals of the investors, and (iv) 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.

14.5 Keywords

Constant Dollar Value Plan: An investment strategy designed to reduce volatility in which
securities, typically mutual funds, are purchased in fixed dollar amounts at regular intervals,
regardless of what direction the market is moving.
Constant-ratio Plan: This is an investment strategy in which the portfolio's composition by
asset class is maintained at a certain level through periodic adjustments.

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