Portfolio and Client Management
Client management process
Portfolio management begins with know-your-client information: goals, time horizon, liquidity needs, income, net worth, tax situation, risk tolerance and risk capacity. The investment policy statement (IPS) records objectives, constraints and permitted asset classes. Asset allocation-not security selection alone-drives much of portfolio variability. Diversification reduces unsystematic risk; its benefit increases when correlations are low. Modern portfolio theory uses expected return, variance and correlation to identify efficient portfolios. Rebalancing restores target weights and controls drift.
Measurement and traps
Performance should be judged against an appropriate benchmark and over a meaningful period. Time-weighted return (TWR) removes the effect of client cash flows and measures manager performance; money-weighted return (MWR) reflects the investor’s actual experience. Risk tolerance is not the same as risk capacity. Correlation of +1 gives no diversification; negative correlation can reduce volatility. Past returns do not guarantee future results.
Worked rule
Expected portfolio return is the weighted average of component returns. A 60/40 portfolio with expected returns of 7% on equities and 3% on bonds has expected return 0.60×7% + 0.40×3% = 5.4%. This simple estimate ignores rebalancing and correlation effects on risk. Use it only as a starting point, then examine portfolio volatility and suitability.