Noesis
Level 4 — ApplicationAsset Allocation & Rebalancing

Asset Allocation & Rebalancing

⏱ 60 minutes50 marksprintable — key stays hidden on paper

Level: 4 (Application — novel problems, no hints) Time Limit: 60 minutes Total Marks: 50

Question 1 — Strategic Allocation & Portfolio Drift (10 marks)

Anita sets a strategic target of 60% equity / 30% debt / 10% gold. She invests ₹10,00,000 initially in these proportions. After one year the asset classes return: equity +25%, debt +6%, gold −4%.

(a) Compute the value of each asset class and the total portfolio value after one year. (4) (b) Compute the new (drifted) percentage weights of each asset class. (3) (c) Compute the absolute drift (in percentage points) of the equity sleeve from its target. (3)

Question 2 — Threshold vs Calendar Rebalancing (12 marks)

Ravi uses a threshold rebalancing rule: rebalance any asset class back to target whenever its weight deviates by more than ±5 percentage points from target. His targets are 70% equity / 30% debt.

Using the drifted portfolio from Question 1 is NOT required here — use these fresh figures: portfolio value ₹8,00,000 with equity currently at ₹6,20,000 and debt at ₹1,80,000.

(a) Determine the current weights and state whether the threshold is breached. (4) (b) Compute the exact rupee amount to be moved between asset classes to restore target weights, and state the direction of the trade. (4) (c) Give two reasons an investor might prefer calendar rebalancing over threshold rebalancing despite threshold being more responsive. (4)

Question 3 — Age-Based Allocation & Core-Satellite (10 marks)

An advisor uses the "110 minus age" rule for equity allocation, with the remainder in debt.

(a) Compute the target equity/debt split for a 42-year-old client. (3) (b) The client wants a core-satellite structure where the equity portion is split so the core is 80% (index funds) and satellites are 20% (active bets). For a ₹20,00,000 portfolio, compute the rupee amounts for: debt, equity-core, and equity-satellite. (4) (c) Explain why the core-satellite approach can lower overall cost while still allowing tactical tilts. (3)

Question 4 — Rupee Cost Averaging (10 marks)

Meera invests ₹12,000 every month into a fund via SIP over 4 months. The NAV per unit at each purchase is: ₹100, ₹80, ₹120, ₹96.

(a) Compute the total units bought and the average cost per unit she paid. (4) (b) Compute the simple average of the four NAVs and explain why it differs from her average cost per unit. (3) (c) State the value of her holding at the end if the final NAV is ₹110, and her overall profit/loss. (3)

Question 5 — Tax-Efficient & Goal-Based Allocation (8 marks)

A client has two goals: Goal A (retirement, 25 years away) and Goal B (car purchase, 2 years away).

(a) Recommend an appropriate risk/asset allocation for each goal and justify in one line each. (4) (b) The client holds identical equity funds in both a taxable account and a tax-advantaged account. Explain, using the concept of asset location, whether high-turnover/high-tax assets should sit in the taxable or tax-advantaged account, and why. (4)

Answer keyMark scheme & solutions

Question 1 (10 marks)

(a) Initial split of ₹10,00,000:

  • Equity = 60% = ₹6,00,000 → ×1.25 = ₹7,50,000
  • Debt = 30% = ₹3,00,000 → ×1.06 = ₹3,18,000
  • Gold = 10% = ₹1,00,000 → ×0.96 = ₹96,000
  • Total = 7,50,000 + 3,18,000 + 96,000 = ₹11,64,000 (1 mark each = 4)

(b) New weights (÷11,64,000):

  • Equity = 750000/1164000 = 64.43%
  • Debt = 318000/1164000 = 27.32%
  • Gold = 96000/1164000 = 8.25% (1 each = 3)

(c) Equity drift = 64.43% − 60% = +4.43 percentage points (3 — must be pp not %)

Question 2 (12 marks)

(a) Weights: equity = 620000/800000 = 77.5%, debt = 180000/800000 = 22.5%. Deviation from 70% = +7.5 pp > 5 pp → threshold breached. (4)

(b) Target equity = 70% × 800000 = ₹5,60,000; target debt = ₹2,40,000. Move = 620000 − 560000 = ₹60,000 sold from equity, bought into debt. (4)

(c) Any two (2 each):

  • Calendar rebalancing is simpler/systematic — fixed dates, no monitoring needed.
  • Fewer, predictable transactions → lower/known trading costs and easier tax planning.
  • Avoids over-trading in volatile markets where thresholds trigger frequently.
  • Easier to automate/administer for many clients. (4)

Question 3 (10 marks)

(a) Equity = 110 − 42 = 68%, debt = 32%. (3)

(b) Portfolio ₹20,00,000:

  • Debt = 32% = ₹6,40,000
  • Equity total = 68% = ₹13,60,000
  • Core = 80% × 13,60,000 = ₹10,88,000
  • Satellite = 20% × 13,60,000 = ₹2,72,000 (4)

(c) The large core in low-cost index funds keeps average expense ratio and turnover low, while the small satellite allows active/tactical bets for potential alpha without exposing the whole portfolio to high fees or manager risk. (3)

Question 4 (10 marks)

(a) Units each month = 12000/NAV:

  • 12000/100 = 120
  • 12000/80 = 150
  • 12000/120 = 100
  • 12000/96 = 125 Total units = 495. Total invested = ₹48,000. Average cost/unit = 48000/495 = ₹96.97 (approx). (4)

(b) Simple average NAV = (100+80+120+96)/4 = ₹99.00. It is higher than average cost (₹96.97) because rupee cost averaging buys more units when price is low and fewer when high (harmonic-mean effect), pulling the effective cost below the arithmetic mean. (3)

(c) Holding value = 495 × 110 = ₹54,450. Profit = 54450 − 48000 = ₹6,450. (3)

Question 5 (8 marks)

(a) (2 each)

  • Goal A (25 yrs): equity-heavy (e.g. 80–90% equity) — long horizon lets it ride out volatility for growth.
  • Goal B (2 yrs): debt/liquid-heavy (e.g. 80–100% debt/cash) — short horizon needs capital protection.

(b) High-turnover/high-tax (frequently taxed) assets should sit in the tax-advantaged account, so that interest/short-term gains and frequent taxable events are sheltered/deferred; tax-efficient assets (low-turnover equity/index) go in the taxable account. This is asset location — maximising after-tax return by matching each asset's tax profile to the right account. (4)

[
  {"claim":"Q1 total portfolio value = 1164000","code":"eq=600000*1.25; d=300000*1.06; g=100000*0.96; result=(eq+d+g==1164000)"},
  {"claim":"Q1 equity drift = 4.43pp","code":"w=750000/1164000*100; result=(round(w-60,2)==4.43)"},
  {"claim":"Q2 rebalance amount = 60000","code":"result=(620000-0.70*800000==60000)"},
  {"claim":"Q3 satellite = 272000","code":"eq=0.68*2000000; sat=0.20*eq; result=(sat==272000)"},
  {"claim":"Q4 total units = 495 and profit = 6450","code":"u=12000/100+12000/80+12000/120+12000/96; result=(u==495 and 495*110-48000==6450)"},
  {"claim":"Q4 simple avg NAV = 99","code":"result=((100+80+120+96)/4==99)"}
]