Constant Ratio Plan

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.

Investopedia explains '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.



comments powered by Disqus
Hot Definitions
  1. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  2. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  3. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
  4. Master Limited Partnership - MLP

    A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP's cash flow, whereas the general partner is the party responsible for managing the MLP's affairs and receives compensation that is linked to the performance of the venture.
  5. Class Action

    An action where an individual represents a group in a court claim. The judgment from the suit is for all the members of the group (class).
  6. Retail Sales

    An aggregated measure of the sales of retail goods over a stated time period, typically based on a data sampling that is extrapolated to model an entire country. In the U.S., the retail sales report is a monthly economic indicator compiled and released by the Census Bureau and the Department of Commerce.
Trading Center