CFA Level I Exam · Portfolio Management: An Overview

Steps in the Portfolio Management Process

Updated 7 October 2026 · Fact-checked

The portfolio management process has three stages: planning, execution and feedback. Planning means understanding the client and writing an investment policy statement (IPS). Execution means choosing the asset allocation and selecting securities. Feedback means monitoring, rebalancing and evaluating performance. On the exam, match each task to its stage.

Understand Steps in the Portfolio Management Process

Portfolio management is a repeating process, not a one-time decision. The CFA curriculum splits it into three stages: planning, execution and feedback. Each stage has a clear job, and exam questions usually ask which task belongs where.

Planning comes first. You learn who the client is: their needs, goals, risk tolerance and limits. You then write these down in an investment policy statement (IPS). The IPS is a written plan that guides every later decision. It states the return and risk objectives, and the constraints such as liquidity needs, time horizon, taxes, legal and regulatory limits, and unique circumstances. Many IPSs also state the benchmark used to judge results. You also form capital market expectations here, which are your views on how asset classes may perform.

Execution turns the plan into a real portfolio. You use the IPS and your capital market expectations to set a strategic asset allocation (SAA). This is the long-term target mix across asset classes, such as 60% equities and 40% bonds. Then you build the portfolio: choose securities, decide how much of each to hold, and trade. Trading costs and market impact matter at this point. A manager may also make short-term tactical shifts away from the SAA, but the SAA is the anchor.

Feedback closes the loop. You monitor the portfolio and the client. Markets move, so actual weights drift from the targets. You rebalance to bring weights back to the targets. You also watch for changes in the client's life, such as a new job, retirement or a large expense. These changes may require updating the IPS. Finally, you measure performance against the benchmark, which is performance evaluation. What you learn feeds back into planning, so the process repeats.

Key formulas to remember

Three stages of the process: Planning → Execution → Feedback; Planning: client needs, IPS, capital market expectations. Execution: strategic asset allocation, security selection, trading. Feedback: monitoring, rebalancing, performance evaluation.
IPS core content: IPS = Objectives (return, risk) + Constraints (liquidity, time horizon, tax, legal/regulatory, unique circumstances); Remember it as objectives plus constraints. The IPS is a written document and is reviewed when the client's situation changes.
Drift from target weight: Drift = Current weight − Target weight; Current weight = asset value ÷ total portfolio value. Rebalancing is the action taken to reduce this drift.

How to solve Steps in the Portfolio Management Process questions

Use this method for any question that asks you to place a task in the process or judge a manager's action.

1Read the stem and underline the task described, such as writing objectives, choosing a mix, buying securities or checking drift.
2Ask whether the task happens before the portfolio exists (planning), while it is built (execution), or after it is running (feedback).
3If the task involves the client's goals, risk tolerance or limits, think IPS and planning.
4If the task sets the long-term asset class mix, it is strategic asset allocation. Securities selection and trading come after it.
5If the task compares actual with target weights, or tracks performance or client changes, it is feedback.
6Check the three options against your stage. Eliminate any option that puts a task in the wrong stage or in the wrong order.
7For numerical drift questions, compute current weights as value ÷ total value before comparing with targets.

Quickest way: Stage-keyword sorting

When to use it: Use it for any conceptual question where you have about 90 seconds and need to place a task fast.

Tag the task with one keyword: client or IPS means planning; allocate, select or trade means execution; monitor, rebalance or evaluate means feedback.
Remember that SAA is set from the IPS, so it cannot come before it.
Pick the option that matches the keyword and discard the other two.
If two options look similar, choose the one that respects the order: plan, then execute, then feedback.

Common mistakes in Steps in the Portfolio Management Process

Placing strategic asset allocation in the planning stage.
It sounds like a plan, and it is based on the IPS.
Fix: Treat SAA as the first step of execution. Planning produces the IPS and expectations; SAA applies them.
Saying the IPS only lists the client's return goal.
Students remember 'objectives' and forget the constraints.
Fix: The IPS covers both objectives (return and risk) and constraints (liquidity, time horizon, tax, legal and regulatory, unique circumstances).
Treating the process as a one-way line that ends after the portfolio is built.
Students think the portfolio is finished once securities are bought.
Fix: Feedback loops back into planning. Changes in the client's situation or in expectations can lead to a revised IPS.
Confusing rebalancing with changing the strategic asset allocation.
Both change the weights.
Fix: Rebalancing restores the existing targets after drift. Changing the SAA means the targets themselves change, usually because the IPS or expectations changed.
Treating performance evaluation as part of planning.
The benchmark is chosen in the IPS, so students link the two.
Fix: The benchmark is set in planning, but measuring results against it is a feedback task.

Worked examples

Example 1

A portfolio manager meets a new client, records the client's risk tolerance, liquidity needs and time horizon, and writes them in a formal document. In which stage of the portfolio management process is the manager working? A. Planning B. Execution C. Feedback

Show the solution

The task is gathering client needs and limits and writing them down.
This produces the investment policy statement.
The IPS is created before any portfolio is built, so it belongs to the first stage.
Execution would involve allocating assets and trading. Feedback would involve monitoring and evaluation. Neither fits.

Answer: A. Planning.

Example 2

A portfolio has a target weight of 60% in equities. Equities are now worth $780,000 and bonds are worth $420,000. What is the equity drift, and what action restores the target? A. Drift of −5 percentage points, so buy equities B. Drift of +5 percentage points, so sell equities C. Drift of +65 percentage points, so sell equities

Show the solution

Total value = $780,000 + $420,000 = $1,200,000.
Current equity weight = 780,000 ÷ 1,200,000 = 65%.
Drift = Current weight − Target weight = 65% − 60% = +5 percentage points.
A positive drift means equities are over target, so the manager sells equities. Check in value: the target equity amount is 60% × $1,200,000 = $720,000, so about $60,000 of equities is sold and the proceeds go to bonds.
Option A reverses the sign by computing target minus current. Option C reports the current weight (65%) as if it were the drift. Only option B is correct.

Answer: B. Drift of +5 percentage points, so sell equities.

Exam tips

Questions often list a task and ask for its stage. Learn one task per stage cold: IPS (planning), SAA (execution), rebalancing (feedback).
Expect an IPS content question. Know that it holds objectives and constraints, and that it should be reviewed as circumstances change.
Watch for order traps. The IPS comes before asset allocation, and asset allocation comes before security selection.
Do not overthink. These are usually quick conceptual items, so answer in under a minute and leave time for calculation questions.

Practice questions from Portfolio Management: An Overview

Steps in the Portfolio Management Process in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Steps in the Portfolio Management Process: frequently asked questions

What are the steps in the portfolio management process?

There are three stages: planning, execution and feedback. Planning covers client needs, the IPS and capital market expectations. Execution covers strategic asset allocation, security selection and trading. Feedback covers monitoring, rebalancing and performance evaluation.

What is an investment policy statement in CFA Level I?

An IPS is a written document that guides all portfolio decisions for a client. It sets out return and risk objectives and constraints such as liquidity, time horizon, tax, legal and regulatory limits, and unique circumstances. It is reviewed when the client's situation changes.

What is the difference between strategic asset allocation and rebalancing?

Strategic asset allocation sets the long-term target weights for each asset class. Rebalancing is the later action of trading back to those targets after market moves cause drift. The targets stay the same during rebalancing.

Is performance evaluation part of the process?

Yes. It belongs to the feedback stage, where you compare results with the benchmark. The benchmark itself is usually agreed during planning.