Asset Allocation & Rebalancing

Q1. (4 marks)

• Strategic asset allocation (SAA): a long-term, policy-based mix of asset classes set according to an investor's risk tolerance, time horizon and goals; held stable and only periodically reviewed. (2)
• Difference: Tactical asset allocation (TAA) makes short-term, deliberate deviations from the strategic mix to exploit market opportunities/mispricings, then reverts to the strategic weights. SAA is passive/long-term; TAA is active/short-term. (2)

Q2. (4 marks)

• Equity % $= 100 - 35 = 65\%$. (1)
• Equity $= 0.65 \times 8{,}00{,}000 = ₹5{,}20{,}000$. (1.5)
• Debt $= 0.35 \times 8{,}00{,}000 = ₹2{,}80{,}000$ (or $8{,}00{,}000 - 5{,}20{,}000$). (1.5)

Q3. (4 marks)

• Calendar rebalancing: portfolio is rebalanced at fixed time intervals (e.g., quarterly/annually) regardless of drift. (1) Advantage: simple, disciplined, low monitoring effort. (1)
• Threshold rebalancing: portfolio is rebalanced only when an asset's weight deviates beyond a preset band (e.g., ±5%). (1) Advantage: responsive to market moves, avoids unnecessary trades/costs when drift is small. (1)

Q4. (4 marks)

• Total $= 66{,}000 + 34{,}000 = ₹1{,}00{,}000$. (1)
• Current equity weight $= 66{,}000/1{,}00{,}000 = 66\%$. (1.5)
• Drift $= 66\% - 60\% = +6$ percentage points (debt is $34\%$, i.e. $-6$ pp). (1.5)

Q5. (4 marks)

• Core-satellite combines a large stable core with smaller active satellites. (1)
• Core: low-cost, diversified, passive holdings (e.g., index funds/ETFs) forming the bulk of the portfolio — provides broad market exposure. (1.5)
• Satellite: smaller actively-managed or thematic/sector positions aiming to add extra return (alpha). (1.5)

Q6. (5 marks)

• Units month 1 $= 6000/10 = 600$. (1)
• Units month 2 $= 6000/12 = 500$. (1)
• Units month 3 $= 6000/15 = 400$. (1)
• Total units $= 600 + 500 + 400 = 1500$. (1)
• Average cost $= 18{,}000 / 1500 = ₹12$ per unit. (1) (Note: this is below the simple average NAV of ₹12.33 — benefit of cost averaging.)

Q7. (3 marks)

• Goal-based investing: structuring investments around specific financial goals (e.g., retirement, child's education), each with its own target amount, horizon and allocation. (2)
• Short-term goals need capital protection → more debt/lower risk; long-term goals can tolerate volatility → more equity for growth. (1)

Q8. (4 marks) (any two, 2 each)

• Place tax-inefficient / high-income assets (bonds, REITs, high-turnover funds) in tax-advantaged/deferred accounts. (2)
• Hold tax-efficient / long-term-growth assets (equities held long term) in taxable accounts to benefit from lower long-term capital gains rates. (2)
• (Also acceptable: harvest losses, hold equities >1 year to qualify for LTCG.)

Q9. (5 marks)

• Total $= ₹5{,}00{,}000$. Current equity weight $= 3{,}00{,}000/5{,}00{,}000 = 60\%$. (1)
• Deviation $= 60\% - 50\% = 10$ pp $> 5$ pp band → rebalancing triggered. (1.5)
• Target equity $= 0.50 \times 5{,}00{,}000 = ₹2{,}50{,}000$. (1)
• Amount to shift $= 3{,}00{,}000 - 2{,}50{,}000 = ₹50{,}000$ from equity to debt. (1.5)

Q10. (3 marks)

• Portfolio drift: the gradual deviation of actual asset weights from their target allocation over time. (2)
• It occurs because asset classes earn different returns; better-performing assets grow to a larger share, changing weights even without any buying/selling by the investor. (1)

[
  {"claim":"Q2 equity allocation for age 35 on 800000 is 520000","code":"eq=(100-35)/100*800000; result = (eq==520000)"},
  {"claim":"Q4 current equity weight is 66 percent and drift is 6 pp","code":"w=66000/100000*100; drift=w-60; result = (w==66 and drift==6)"},
  {"claim":"Q6 total units 1500 and average cost 12","code":"u=6000/10+6000/12+6000/15; avg=18000/u; result = (u==1500 and avg==12)"},
  {"claim":"Q9 rebalancing triggered and shift is 50000","code":"w=300000/500000*100; trig=abs(w-50)>5; target=0.5*500000; shift=300000-target; result = (trig==True and shift==50000)"}
]