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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Construction Process

In the portfolio construction process followed by an investment adviser, which step should logically come first?

The first step is understanding the client's risk profile, objectives and constraints and recording them in an investment policy statement. Asset allocation, security selection, rebalancing and performance measurement all depend on this foundation, so they come afterwards in the process.

  1. ASelecting individual securities for the portfolio
  2. BUnderstanding the client's risk profile, objectives and constraints and documenting them in an investment policy statementCorrect
  3. CRebalancing the portfolio to target weights
  4. DMeasuring the portfolio's performance against a benchmark

Explanation

Portfolio construction begins with knowing the client: return objectives, risk tolerance, time horizon, liquidity needs and constraints, usually recorded in an investment policy statement. Security selection, rebalancing and performance measurement all depend on this input and follow it.

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