DEFINITION of 'Constant Ratio Plan'

An asset allocation strategy in which assets are assigned a fixed percentage in a portfolio and readjusted to their target weights periodically. The readjustment allows the portfolio to remain properly weighted, and forces the sale of outperforming assets and purchase of underperforming assets. In a constant ratio plan, the manager must choose how often to rebalance the portfolio and weigh the tradeoff between the desire to frequently rebalance and the added transaction costs that will result.

BREAKING DOWN 'Constant Ratio Plan'

A constant ratio plan differs from buy-and-hold and momentum strategies. Buy-and-hold investors set one allocation and don't rebalance, while momentum investors sell underperforming assets and buy outperforming ones. A constant ratio plan performs best in a volatile market with a general mean-reverting pattern. For example, if the stock market is oscillating, a constant ratio plan will buy when stock prices fall and sell when they rise.

RELATED TERMS
  1. Dynamic Asset Allocation

    A portfolio management strategy that involves rebalancing a portfolio ...
  2. Strategic Asset Allocation

    A portfolio strategy that involves setting target allocations ...
  3. Tactical Asset Allocation - TAA

    An active management portfolio strategy that rebalances the percentage ...
  4. Portfolio Weight

    The percentage composition of a particular holding in a portfolio. ...
  5. Rebalancing

    The process of realigning the weightings of one's portfolio of ...
  6. Aggressive Investment Strategy

    A portfolio management strategy that attempts to maximize returns ...
Related Articles
  1. Managing Wealth

    Choose Your Own Asset Allocation Adventure

    There are many strategies to help balance your portfolio. Here are a few to get you started.
  2. Managing Wealth

    6 Asset Allocation Strategies That Work

    Your portfolio's asset mix is a key factor in whether it's profitable. Find out how to get this delicate balance right.
  3. Financial Advisor

    An Introduction to Asset Allocation

    A portfolio is only as strong as its asset allocation. To create the right one, investors need to determine their risk tolerance, time horizon and goals.
  4. Investing

    Rebalance Your Portfolio To Stay On Track

    Like a tune-up for a car, this re-alignment should minimize trouble down the road.
  5. Investing

    6 Asset Allocation Strategies That Work

    An asset mix should reflect an investor’s current goals. Here are a few strategies for establishing the right allocation.
  6. Managing Wealth

    Achieving Optimal Asset Allocation

    Minimizing risk while maximizing return with the right mix of securities is the key to achieving your optimal asset allocation.
  7. Investing

    Know When To Buy & Hold It, Know When To Fold It

    A passive buy-and-hold strategy using ETFs is one of the most efficient ways of building a portfolio.
  8. Financial Advisor

    4 Steps To Building A Profitable Portfolio

    This is a step-by-step approach to determining, achieving and maintaining optimal asset allocation.
  9. Investing

    Mutual Fund Tune-Up Delivers High-Powered Performance

    Rebalancing your portfolio will protect you from risk and ensure that your investments are performing at their best.
  10. Investing

    5 Tips to Increase the Performance Of Your Portfolio

    Discover helpful steps an investor can easily take to improve the performance of his investment portfolio by maximizing gains and minimizing losses.
RELATED FAQS
  1. The primary reason for an IA to rebalance a client’s portfolio is to:

    A. ensure the portfolio matches the asset allocation chosen for the client's risk tolerance and objectives. B. increase portfolio ... Read Answer >>
  2. How do I know when to "rebalance" my investments?

    In order to have a disciplined approach using "rebalancing style" investing, you must first setup a defined model that specifies ... Read Answer >>
  3. How can I use asset allocation to properly diversify my portfolio?

    Understand how asset allocation works, and learn how you can use asset allocation to diversify your investment portfolio ... Read Answer >>
  4. What does the end of the quarter mean for portfolio management?

    Take a deeper look at why the end of a financial quarter, and all of its accompanying reports, is a significant event for ... Read Answer >>
  5. A formula timing plan which consists of periodic purchases of a fixed dollar amount ...

    a. Dollar cost averaging b. Share averagingc. Constant dollar pland. Constant ratio plan Answer: A"A" is correct because ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center