Portfolio Management Process

Once the type of investment client has been determined along with their financial goals, a series of steps needs to be followed to ensure those goals and needs are met.

The Planning Step

Once the client’s objectives and constraints have been established, an investment policy statement (IPS) must be developed. This is a written document describing all the investment objectives and constraints that apply to a client’s portfolio and may also contain a reference to a benchmark. A benchmark can be used to assess investment performance and evaluate whether the objectives have been achieved.

The Execution Step

The execution step has three stages – asset allocation, security analysis, and portfolio construction.

Asset Allocation

The analyst or portfolio manager will form a view on the economic and capital market expectations for various available asset classes. This analysis may be top-down which starts with a consideration of the macroeconomic or industry environment and an evaluation of those asset classes expected to perform well given the environment. Or, the analysis may be bottom-up, which rather than looking at macroeconomic or industry data, focuses on company-specific factors. A decision will then be taken on the allocation of assets to the available asset classes. Assets classes can include equities, bonds, and cash as well as real estate, commodities, hedge funds and private equity.

Security Analysis

Top-down and bottom-up views can be combined in selecting individual securities to assess the level of returns and risk and therefore assign a valuation to securities being considered for portfolio inclusion.

Portfolio Construction

Using the IPS, the desired asset allocation, and security analysis, a diversified portfolio can be constructed. Along with the goal of achieving investment performance, risk management is an important focus of the portfolio construction process. The IPS will outline the client’s risk tolerance and the portfolio manager must ensure the portfolio is aligned to this risk profile. Once the portfolio manager has decided exactly which securities to buy and in which amounts, the trades will be implemented. Often this trading is carried out by a specialized trade execution team or external stockbroker.

The Feedback Step

After the portfolio has been constructed, it needs to be reviewed and monitored at an appropriate interval.

Portfolio Monitoring and Rebalancing

Portfolio rebalancing is carried out when the portfolio has drifted from the targeted asset allocation due to market movements. If the top-down or bottom-up views change, an individual security or asset class may need to be changed. If the client’s circumstances change, then a revision of the IPS and the portfolio may be required.

Portfolio Measurement and Reporting

The portfolio performance must be evaluated to establish whether the client’s objectives have been met. The portfolio performance may be assessed relative to the benchmark set out in the IPS. Following analysis of the performance, it may be determined that the client’s objectives have changed and this will feedback into the planning and execution steps.


Select the correct sequence of portfolio management steps.

A. Equity valuation, portfolio performance assessment, trade execution

B. IPS creation, portfolio rebalancing, top-down analysis

C. IPS creation, portfolio construction, monitoring and rebalancing


The correct answer is C.

The portfolio management process must begin with the creation of an investment policy statement in the planning step, then move to analysis and portfolio construction in the execution step and finally rebalance, performance measurement and monitoring must be carried out in the feedback step.


Reading 39 LOS 39d:

Describe the steps in the portfolio management process

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