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foreign [Music] let's regard them as investment clients and you as a portfolio manager are tasked to create and manage your clients portfolio there are three major stages the planning stage followed by the execution stage and maintained through the feedback stage the planning stage begins with an analysis of your clients risk tolerance return objectives time Horizon tax exposure liquidity needs legal and Regulatory constraints and unique circumstances or preferences use this acronym rrt llu to help you remember these seven key elements of analyzing the client they should all be detailed in a later lesson so we just leave them for now after the analysis you should document your findings in an investment policy statement the key element of the IPS is the investment objectives and constraints which act as guiding principles for you and any other parties managing the portfolio the IPS should also specify a benchmark that can be used in the feedback stage to assess the performance of the portfolio and whether objectives have been met also during this stage the IPS should be reviewed and updated every few years and anytime the investors objectives or constraints change significantly once the client has approved the IPS you can proceed to the next stage which is to construct a suitable portfolio based on the IPS this is done by first deciding on a Target asset allocation followed by the security selection and the purchase of individual securities the process of determining the target asset allocation starts with an analysis of the risk and return characteristics of various asset classes common asset classes identified are cash fixed income securities publicly traded stocks private Equity Real Estate as well as commodities you can take the top-down analysis approach which is to examine the current economic conditions and forecasts of such macroeconomic variables such as GDP growth inflation and interest rates in order to identify the asset classes that are most attractive based on the risk and returns expectations of the various asset classes the target asset allocation can be determined the next step is to identify the most attractive Securities in each asset class you can use security valuation models to identify undervalued Securities to invest in this is termed the bottom-up approach once all the Securities have been identified the final step is to construct the portfolio by purchasing the Securities in the most cost efficient way and once that is done the feedback step can be termed the maintenance stage over time investor circumstances will change risk and return characteristics of asset classes will change due to economic changes and the actual weights of the Assets in the portfolio will change with asset prices you as the portfolio manager must monitor these changes and update the IPS with the client if required update and Target asset allocation and securities and rebalance the portfolio periodically finally the performance of the portfolio must be periodically evaluated this is done by measuring the portfolio returns relative to the return on the Benchmark identified in the IPS analysis of the portfolio performance may suggest that the client's objectives need to be reviewed and updated you're watching an excerpt from our comprehensive animation library for more videos like these head on down to prepnuggets.com at prep nuggets let us do the hard work for you