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

In the portfolio construction process for an individual client, which step logically comes first, before the strategic asset allocation is decided?

The Investment Policy Statement comes first because it records the client's return objectives, risk tolerance and constraints. Strategic asset allocation, security selection, implementation, rebalancing and performance evaluation all depend on it, so none of them can logically precede it in the portfolio construction process.

  1. ASelecting individual securities within each asset class
  2. BPreparing the Investment Policy Statement covering the client's objectives and constraintsCorrect
  3. CRebalancing the portfolio to target weights
  4. DComparing portfolio returns with the benchmark

Explanation

The process begins with understanding the client and documenting objectives and constraints in the Investment Policy Statement. Asset allocation, security selection, rebalancing and performance evaluation follow. Selecting securities or rebalancing cannot occur before the policy is set.

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