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

In the portfolio construction process for a client of an investment adviser, which step logically comes first?

The first step is understanding the client's objectives, constraints and risk profile. Every later decision, such as asset allocation, security selection, rebalancing and performance evaluation, depends on these inputs, so the adviser must establish them before building any portfolio.

  1. ASelecting individual securities for the portfolio
  2. BUnderstanding the client's objectives, constraints and risk profileCorrect
  3. CRebalancing the portfolio after market movements
  4. DMeasuring portfolio performance against a benchmark

Explanation

Portfolio construction begins with the client's goals, risk tolerance, time horizon, liquidity needs and constraints, which are usually recorded in an investment policy statement. Security selection, rebalancing and performance measurement all follow once these are known.

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