Unit study guide · NISM Series XXI-B
Portfolio Rebalancing
6 questions in this unit
What this unit covers
- Under a simple buy-and-hold strategy with no cash flows, what happens when one asset outperforms the other holdings?
- How does constant-mix rebalancing typically respond when equities fall relative to bonds?
- A 60% equity target allows a five-percentage-point drift in either direction, including the boundaries. Which equity weight breaches that band?
- Equities are ₹70 lakh and bonds ₹30 lakh. After a ₹10 lakh cash contribution, what equity sale restores a 60% equity target?
- A constant proportion portfolio insurance strategy has ₹100 lakh wealth, an ₹80 lakh floor and multiplier 3. What is its uncapped risky allocation?
- Equities of ₹60 lakh suddenly fall 40% before rebalancing, while ₹40 lakh cash stays unchanged. What shortfall arises against an ₹80 lakh floor?
Key ideas
From the practice bank · 1
Under a simple buy-and-hold strategy with no cash flows, what happens when one asset outperforms the other holdings?
The outperforming asset’s weight can rise because its value grows faster than the rest of the portfolio. Buy-and-hold does not automatically restore starting weights. Remember: Portfolio weights can change even when no trades occur.
Hint A holding’s percentage depends on relative market values, not just trading activity. Common mistake: Assuming unchanged unit holdings imply unchanged asset-allocation percentages.
XXI-B-145From the practice bank · 2
How does constant-mix rebalancing typically respond when equities fall relative to bonds?
Constant mix buys the relatively underweight equities and sells bonds to restore the target proportions. This is a rebalancing rule rather than a guarantee that the next price move will reverse. Remember: Constant mix generally trades against relative price movements.
Hint Identify which asset has become underweight relative to the existing policy. Common mistake: Confusing a fixed allocation rule with a prediction that falling assets must recover.
XXI-B-146From the practice bank · 3
A 60% equity target allows a five-percentage-point drift in either direction, including the boundaries. Which equity weight breaches that band?
A 54% equity weight breaches the band because the permitted range is 55% to 65%, including both ends. Lower limit = 60% − 5 percentage points = 55%. Upper limit = 60% + 5 percentage points = 65%. Remember: A threshold rule must specify its limits and whether boundaries trigger a trade.
Hint Convert the allowed drift into both lower and upper limits. Common mistake: Treating five percentage points as 5% of the original target weight.
XXI-B-147From the practice bank · 4
Equities are ₹70 lakh and bonds ₹30 lakh. After a ₹10 lakh cash contribution, what equity sale restores a 60% equity target?
An equity sale of ₹4 lakh is needed because the new target equity amount is ₹66 lakh. New total = ₹70 + ₹30 + ₹10 = ₹110 lakh. Equity target = 60% × ₹110 lakh = ₹66 lakh. Sale = ₹70 lakh − ₹66 lakh = ₹4 lakh. The cash contribution and sale proceeds can together increase bonds to ₹44 lakh, ignoring costs. Remember: New contributions can reduce, but need not eliminate, required rebalancing trades.
Hint Include the new cash in total wealth before calculating the new target holding. Common mistake: Calculating target holdings using the portfolio value before the external cash flow.
XXI-B-148From the practice bank · 5
A constant proportion portfolio insurance strategy has ₹100 lakh wealth, an ₹80 lakh floor and multiplier 3. What is its uncapped risky allocation?
The risky allocation is ₹60 lakh because the multiplier applies to the ₹20 lakh cushion. Cushion = ₹100 lakh − ₹80 lakh = ₹20 lakh. Risky allocation = 3 × ₹20 lakh = ₹60 lakh. The remaining ₹40 lakh is allocated to the safe asset under the stated simple model. Remember: Constant proportion portfolio insurance scales risky exposure to the cushion, not total wealth.
Hint Identify the cushion above the floor before applying the strategy’s multiplier. Common mistake: Treating the floor as the amount that must always be held in the safe asset.
XXI-B-149From the practice bank · 6
Equities of ₹60 lakh suddenly fall 40% before rebalancing, while ₹40 lakh cash stays unchanged. What shortfall arises against an ₹80 lakh floor?
The portfolio is ₹4 lakh below its floor because the abrupt fall leaves only ₹76 lakh. Equity value = ₹60 lakh × 0.60 = ₹36 lakh. Total wealth = ₹36 lakh + ₹40 lakh = ₹76 lakh. Floor shortfall = ₹80 lakh − ₹76 lakh = ₹4 lakh. This illustrates gap risk when rebalancing cannot occur in time. Remember: A portfolio-insurance rule is not an unconditional guarantee against a sudden market gap.
Hint Revalue the exposed part first, then compare total remaining wealth with the floor. Common mistake: Assuming the strategy can always rebalance continuously before a floor breach.
XXI-B-150