Rebalancing a client mandate
Series XXI-B case study · set 1, case 1 of 6 · 5 questions · 2 marks each
Question 1 of 5Case practice
0 right · 0 wrong · 5 to go
The case · stays here for all 5 questions
A discretionary portfolio contains ₹70 lakh of equities, ₹20 lakh of bonds and ₹10 lakh of cash. The client’s agreed investment policy targets 60% equities, 30% bonds and 10% cash, measured on the whole portfolio. A known ₹8 lakh payment is due in six months, so the manager must retain the full current cash buffer for this exercise. The policy also limits any one equity issuer to 10% of total portfolio value. One issuer is currently worth ₹14 lakh. The manager will rebalance at the current values without taxes or trading costs, first correcting the issuer excess and then making any remaining equity reduction. All policy limits are client-specific assumptions, not statutory limits.
All amounts and contract terms in this case are hypothetical.
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The case and its answers
Every question of this case, with its answer and why each other option is wrong.
A discretionary portfolio contains ₹70 lakh of equities, ₹20 lakh of bonds and ₹10 lakh of cash. The client’s agreed investment policy targets 60% equities, 30% bonds and 10% cash, measured on the whole portfolio. A known ₹8 lakh payment is due in six months, so the manager must retain the full current cash buffer for this exercise. The policy also limits any one equity issuer to 10% of total portfolio value. One issuer is currently worth ₹14 lakh. The manager will rebalance at the current values without taxes or trading costs, first correcting the issuer excess and then making any remaining equity reduction. All policy limits are client-specific assumptions, not statutory limits.
All amounts and contract terms in this case are hypothetical.
Q1What is the portfolio’s total current value?
Option A. ₹70 lakh
Why it is wrong: This counts only equities.
Option B. ₹108 lakh
Why it is wrong: The future payment is not an extra asset.
Option C. ₹90 lakh
Why it is wrong: This excludes cash even though the policy uses the whole portfolio.
Option D. ₹100 lakh — Correct answer
Answer: D. ₹70 lakh + ₹20 lakh + ₹10 lakh = ₹100 lakh. Remember: Use the policy’s stated allocation base.
Hint, shown before you answer in practice mode: Include equities, bonds and cash in the same base.
XXIB-S1-C01-Q1easynumerical
Q2What total equity sale is needed to reach the 60% target?
Option A. ₹20 lakh
Why it is wrong: This reduces equities below the agreed target.
Option B. ₹14 lakh
Why it is wrong: This sells the entire concentrated issuer, which is not required.
Option C. ₹4 lakh
Why it is wrong: This corrects issuer concentration but not the whole equity target.
Option D. ₹10 lakh — Correct answer
Answer: D. Target equity = 60% × ₹100 lakh = ₹60 lakh. Sell ₹70 lakh − ₹60 lakh = ₹10 lakh. Remember: Concentration limits and asset-allocation targets are separate constraints.
Hint, shown before you answer in practice mode: Compare current equity value with 60% of total assets.
XXIB-S1-C01-Q2mediumnumerical
Q3What minimum sale of the single issuer meets its limit at the unchanged total value?
Option A. ₹4 lakh — Correct answer
Option B. ₹10 lakh
Why it is wrong: This is the whole equity rebalance, not the issuer excess.
Option C. ₹1.40 lakh
Why it is wrong: This takes 10% of the issuer instead of 10% of the portfolio.
Option D. ₹14 lakh
Why it is wrong: A full exit is unnecessary to meet the stated limit.
Answer: A. Maximum issuer value = ₹100 lakh × 10% = ₹10 lakh. Current value is ₹14 lakh, so sell at least ₹4 lakh. Remember: Apply issuer limits against the correct denominator.
Hint, shown before you answer in practice mode: The issuer limit is ₹10 lakh on this portfolio.
XXIB-S1-C01-Q3mediumnumerical
Q4After the total equity sale is invested in bonds, what are the new bond and cash values?
Option A. Bonds ₹30 lakh. Cash ₹10 lakh — Correct answer
Option B. Bonds ₹34 lakh. Cash ₹10 lakh
Why it is wrong: This adds more than the ₹10 lakh sale proceeds.
Option C. Bonds ₹20 lakh. Cash ₹20 lakh
Why it is wrong: This leaves the proceeds in cash and misses the bond target.
Option D. Bonds ₹38 lakh. Cash ₹2 lakh
Why it is wrong: This uses the reserve despite the stated constraint.
Answer: A. Bonds rise from ₹20 lakh to ₹30 lakh. Cash remains ₹10 lakh. Together with ₹60 lakh equity, the 60/30/10 targets are met. Remember: A rebalance must preserve total value when costs and flows are excluded.
Hint, shown before you answer in practice mode: Cash is held unchanged and all equity-sale proceeds go to bonds.
XXIB-S1-C01-Q4mediumapplication
Q5Why is selling only ₹4 lakh of the issuer insufficient as the complete rebalance?
Option A. Because any issuer sale breaks the mandate
Why it is wrong: The mandate explicitly requires concentration control.
Option B. Because cash would necessarily fall below ₹8 lakh
Why it is wrong: Cash need not change in that trade.
Option C. Because the issuer would still exceed ₹10 lakh
Why it is wrong: A ₹4 lakh sale reduces it exactly to ₹10 lakh.
Option D. Equities would still be ₹66 lakh, above the ₹60 lakh target — Correct answer
Answer: D. The issuer sale fixes that limit, but equity total is ₹70 lakh − ₹4 lakh = ₹66 lakh. Another ₹6 lakh of equity must be shifted to bonds. Remember: Passing one portfolio constraint does not establish compliance with all constraints.
Hint, shown before you answer in practice mode: Check the allocation after solving the issuer problem.
XXIB-S1-C01-Q5hardnumerical
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