Portfolio Management

Correct Answer: The client's risk tolerance and investment objectives

The most critical factor in determining the strategic asset allocation for a client's portfolio is the client's risk tolerance and investment objectives. A portfolio manager's duty is to construct a portfolio that aligns with the client's goals and risk preferences. Personal preferences and past experiences of the portfolio manager should not influence the asset allocation decision, as it may not suit the client's needs. While historical performance of various asset classes can provide insights, it should not be the primary driver of asset allocation. Past performance does not guarantee future results, and the strategic asset allocation should be tailored to the client's specific situation.

Correct Answer: S&P 500 Index

The S&P 500 Index is the most appropriate benchmark for a portfolio that primarily consists of large-cap U.S. equities. This index tracks the performance of 500 large companies listed on stock exchanges in the United States, which aligns with the portfolio's composition. The Bloomberg Barclays U.S. Aggregate Bond Index is not suitable because it tracks the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, which does not match the equity-focused portfolio. The MSCI EAFE Index is also not appropriate as it captures large and mid-cap representation across 21 developed markets countries around the world, excluding the U.S. and Canada. This index does not focus on U.S. equities, which is the primary component of the given portfolio.

Correct Answer: Developing an Investment Policy Statement (IPS) that outlines the client's objectives, constraints, and risk tolerance

The best answer is developing an Investment Policy Statement (IPS) that outlines the client's objectives, constraints, and risk tolerance. During the portfolio planning step, the primary focus is on understanding the client's needs, goals, and risk profile. The IPS serves as a roadmap for the portfolio manager, ensuring that the client's objectives are clearly defined and that the investment strategy aligns with those objectives. Conducting a thorough analysis of the client's existing portfolio holdings and assessing their performance is an important task, but it is typically done after the IPS has been established, as part of the portfolio construction and management process. Implementing the agreed-upon asset allocation strategy by selecting specific securities and investment vehicles is also a crucial step, but it comes after the portfolio planning phase, once the IPS has been created and the asset allocation has been determined based on the client's objectives and risk tolerance.