Define Constant Ratio Plan

Constant Ratio Plan

Constant ratio plan attempts to maintain a constant ratio between the aggressive and conservative portfolios. The ratio is fixed by the investor. The investor’s attitude towards risk and return plays a major role in fixing the ratio. The conservative investor may like to have more of bond and the aggressive investor, more of stocks. Once the r$io is fixed, it is maintained as the market moves up and down. As usual, action points may be fixed by the investor. It may vary from investor to investor. As in the previous example, when the stock price moves up or down by 10 to 20 per cent action would be taken. Here, 10 per cent is taken as action point. The table shows the constant ratio plan.

The advantage of constant ratio plan is the automatism with which it forces the manager to counter adjust his portfolio cyclically. But this approach does not eliminate the necessity of selecting individual security.

The limitation of the plan is that the money is shifted from the stock portion to bond portion. Bond is also a capital market instrument and responds to market pressures. Bond and share prices may both rise and fall at the same time. In the downtrend both prices may decline and then gain.