A portfolio is a mix of securities selected. Two variables constitute the composition of a portfolio.

First is the securities included in the portfolio and second the proportion of total funds invested in each security. Portfolio revision involves changing the existing mix of securities .

The need for portfolio revision arise on account of :

a. Availability of additional funds for investment b. Change in risk tolerance c.Change in investment goals. d.Change in financial market.

Ultimate aim of portfolio revision is maximization of

return and minimization of risk.

Two different strategies

1.active
2.passive

Active revision strategy involves frequent and sometimes

substantial adjustments the portfolio.

Followers of active revision strategy believe that market are not efficient and therefore securities are mispriced at times.

This gives an opportunity for earning excess returns through

trading them.

The objective of active strategy is to beat the market. Time, skill and resources required for implementing this strategy will be higher as well as the transaction cost.

Passive strategy involves only minor and infrequent adjustments to the portfolio.

Practitioners of passive revision believe in market

efficiency.

Under passive revision strategy adjustments to portfolio is carried out according to certain predetermined rules and procedures designated as Formula plans.

This help investors to adjust his portfolio according to changes in

security market.

Formula plans consists of predetermined rules regarding when to buy a sell and how much to buy a sell.

These predetermined rules calls for specified action when there is

change in securities market.

CONSTANT RUPEE VALUE PLAN : The investor constructs 2

portfolios. One aggressive consisting of equity shares and the other

defensive consisting of bonds and debentures.

The purpose of this plan is to keep the value of aggressive portfolio constant i.e., at the original amount invested in aggressive portfolio.

Under this plan ,the investor is effectively transferring funds from aggressive portfolio to defensive portfolio when share prices are increasing.

Funds are transferred from defensive portfolio to aggressive portfolio when share prices are low.

Thus the plan help the investor to buy shares when their prices are low and sell them when their prices are high.

A revision point may be fixed as + or - .10

CONSTANT RATIO PLAN :

With his investment fund, the investor could construct 2 portfolios one aggressive and the other defensive.

The ratio between aggressive and defensive portfolio would be predetermined such as 1:1 ,2 :1 etc.

The purpose of this plan is to keep his ratio constant by

readjusting the 2 portfolio when share price fluctuates from time to time.

The revision point may be fixed as + or - .10.

DOLLAR COST AVERAGING :This is another method of passive portfolio revision.

This plan stipulates that the investor invest a constant sum

such as Rs.5000 or Rs 10000 in a specified share or portfolio

of shares regularly at periodical intervals such as a month or two months.

This periodic investment is to continued over a fairly long period to cover a complete cycle of share price movements.

The investor will obtain his shares at a lower average cost

per share.

Portfolio evaluation refers to the evaluation of performance of

portfolio. It is the process of comparing the return earned on a portfolio with the returned on one or more other portfolios or

on a bench mark portfolio.

It includes 2 functions VIZ

A)performance measurement
B)Performance evaluation Performance measurement means measurement of returns earned on a portfolio during holding period or investment period.

Performance evaluation analysis whether performance was superior or inferior or whether the performance due to skill or luck.

Return may be defined to include change in the portfolio over

the holding period plus any income earned over the period.

The one period rate of return r for a mutual fund may be calculated as

Rp = (NAVt NAVt-I ) + D1 +C1 /NAV t-1 NAVt = NAV per unit at the end of holding period

NAVt-1 = NAV per unit at the beginning of holding period.

D1 =cash disbursement per unit during holding period. C1 = Capital gain disbursements during holding period Eg: bonus shares

Rate of return earned by different mutual funds or schemes may be calculated and compared with the ratio of return

earned by a representative stock market index.

Mutual funds may also be ranked in descending order of their rate of return.

Straight forward rate of return comparison is incomplete and misleading.

Differential returns earned could be due to differential risk

exposure . Hence returns have to be adjusted for risk before making

comparison.

Thus the reward per unit of risk for different portfolios or mutual funds may be calculated and funds may be ranked in descending

order of ratio.

A higher ratio indicates higher performance.

Two methods for measuring reward per unit of risk are :

1.Sharp ratio
2.Tery nor ratio

Sharp Ratio ( SR ) =rp rf/p

rp =realized return on portfolio rf= risk free rate of return p =standard deviation of portfolio.

TeRynor ratio (TR ) = rp rf/p

rp = Realized return on portfolio rf =Risk free rate of return

p =beta of the portfolio.

Another type of risk adjusted measure is Jensen measure.

The ratio measures the differential between the actual return

earned on a portfolio and expected return from the portfolio given its level of risk.

E ( Rp ) = Rf + ( Rm-Rf) p

Rf=Risk free rate Rm= Return on market index

p =Beta of the portfolio

p =Rp E(Rp)

= differential return earned

Rp = actual return earned on portfolio E (Rp) =expected return earned on portfolio

If p has a positive value indicates superior performance and negative value indicate bad performance.