Question

1. Explain the constant mix style in portfolio revisions and show how it differs from the dynamic asset allocation.

2. Distinguish when one approach may work better. That is, explain under what market conditions the contrarian strategy may work better and when it may fail to produce a good performance.

Answer 1

1. CONSTANT MIX STRATEGY:( one of the portfolio management strategy)

It is basically allocating stocks and bonds ideally and rebalancing this mix periodically. The aim of constant mix is to maintain a ratio of diverse asset classess. for example( 70% stocks and 30% bonds), within a paricular range of rebalancing.

In CONSTANT MIX investors have to buy securities when the price falls and sell them when price rises.

In DYNAMIC ASSET ALLOCATION, stocks, bonds and shares frequently adjusts to the appropriate market conditions.

for example,In a bearish market if the portfolio has more equities than bonds then the investor sells some equities and purchase bonds to adjust however if the market go bullish investor will purchase more shares in order to reap maximum profit.

therfore the main difference in these two are in constant mix investors have to purchase securities when price falls and vice-versa however in dynamic asset allocation when market falls investor should purchase bonds rather and adjust to the market condition and vice versa.

2. Constant mix strategy investor should maintain a desired mix despite his wealth condition. investor should buy stock when it fall and sell it when it rises. it become more aggressive when stock market crash and play defensive when stock market rise.