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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, which step logically comes first?

The first step is understanding the client's risk profile, objectives and constraints and documenting them in an investment policy statement. Asset allocation, security selection, rebalancing and performance measurement all depend on this foundation, so they come later 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 after market movements
  4. DMeasuring portfolio performance against a benchmark

Explanation

Portfolio construction starts with knowing the client: return objectives, risk tolerance, time horizon, liquidity needs, taxes and constraints, usually recorded in an investment policy statement. Asset allocation, security selection, monitoring and performance evaluation follow this step.

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