CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction
A portfolio manager builds a portfolio by first setting the target allocation across asset classes and then selecting securities within each class to implement those weights. This approach is best described as:
This is a top-down approach. The manager begins with the broad asset allocation decision across asset classes and then picks individual securities to fill each allocation. A bottom-up approach works in the opposite direction, starting from security selection and building the portfolio from those individual choices.
- Aa bottom-up approach
- Ba top-down approachCorrect
- Ca factor-based approach
Explanation
Setting asset class weights first and then choosing securities within them is the defining feature of a top-down approach. A bottom-up approach starts with individual security selection and lets the portfolio weights emerge from those choices.
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