The document outlines the portfolio construction process, defined as combining securities to achieve desired returns with minimal risk, emphasizing diversification to reduce unsystematic risk. It details seven steps for effective portfolio construction, including defining investment objectives, assessing risk tolerance, asset allocation, security selection, portfolio optimization, implementation, and ongoing monitoring. An example portfolio is provided for an investor named Radhika, highlighting her investment strategy, asset breakdown, and management practices.

1. Process of Portfolio
Construction.
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Shirisha T (157)
Harshitha K (190)
Sushmna P (191)

2. Contents
❖What is Portfolio ?
❖ Process of Portfolio
Construction.
❖ Example of Portfolio
Construction.
❖ Tabular representation and
summary of example scenario.
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3. What is Portfolio ?
 Portfolio is a combination of securities such as stocks,
bonds, and money market instruments.
 The process of blending together the broad classes so
as to obtain return with minimum risk is called
PORTFOLIO CONSTRUCTION.
 Diversification of investments helps to spread risk
over many assets and thus reduces unsystematic risk.
 Effective portfolio construction requires a systematic
approach to balancing risk and return while
considering an investor's specific objectives
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4. Process of Portfolio Construction
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5. Step 1: Define Investment
Objectives
Goal: Establish the investor's goals and what they
hope to achieve. This could include:
• Capital growth (increase in value over time).
• Income generation (through dividends or interest).
• Wealth preservation (maintaining the portfolio's
value).
• Specific future goals (retirement, purchasing a
home, etc.).
Considerations: Time horizon, return expectations,
and constraints (liquidity needs, tax considerations).
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6. Step 2 : Assess Risk Tolerance
Goal: Understand how much risk the investor
is willing and able to tolerate.
Factors Affecting Risk Tolerance:
• Investor’s financial situation.
• Emotional tolerance for volatility.
• Time horizon (longer horizons generally allow
for more risk).
Outcome: Helps decide the appropriate mix of
high-risk vs. low-risk assets.
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7. Step 3 : Asset Allocation
Goal: Determine the proportion of different asset
classes in the portfolio. Major asset classes
include:
• Stocks (Equities): Higher risk, but potential for
higher returns.
• Bonds (Fixed Income): Lower risk, offering
stability and income.
• Cash/Cash Equivalents: Safeguard liquidity with
very low risk.
• Alternatives: Real estate, commodities, and other
assets for diversification.
Purpose: Diversify across asset classes to balance
risk and return.
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8. Step 4 : Security Selection
Goal: Choose specific securities (stocks,
bonds, etc.) within each asset class.
• Top-Down Approach: Look at economic
or sector-level analysis.
• Bottom-Up Approach: Focus on
individual security fundamentals (revenue,
earnings, etc.).
Criteria: The selection depends on factors like
company performance, market trends, and
economic forecasts.
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9. Step 5 : Portfolio Optimization
Goal: Ensure the portfolio is balanced to
achieve the maximum return for the level of
risk taken
Use tools like Modern Portfolio Theory
(MPT) to optimize the portfolio’s risk-return
profile.
Diversification: Refine the portfolio to ensure
it’s well-diversified, minimizing unsystematic
risk.
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10. Step 6 : Implementation
Goal: Put the strategy into action by executing
trades to build the portfolio according to the
selected asset allocation and security choices.
Considerations:
• Transaction costs.
• Timing (avoiding market timing but considering
entry points).
• Liquidity requirements.
Execution: Efficiently buying or selling assets
while keeping costs low and staying aligned
with the investor's objectives.
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11. Step 7 : Monitoring & Rebalancing
 Goal: Continuously monitor the portfolio's
performance and make adjustments as necessary.
 Rebalancing: Bring the portfolio back to the original
asset allocation when asset values shift due to market
movements.
 Performance Monitoring: Evaluate portfolio returns,
comparing them to benchmarks and risk-adjusted
performance measures.
 Other Factors: Consider changes in the investor’s
goals, market conditions, or tax considerations when
rebalancing.
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12. Example of Portfolio Construction
 Investor Profile:
• Name: Radhika.
• Age: 30
• Risk Tolerance: Moderate
• Investment Goals: Save for retirement and a home
purchase in 5 years.
 Portfolio Construction:
1. Goals: Aim for 6% annual returns with moderate risk.
2. Financial Info:
• Net Worth: ₹37,50,000
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13. Example of Portfolio Construction
 Asset Allocation
• 60% Stocks: ₹22,50,000
• 30% Bonds: ₹11,25,000
• 10% Cash: ₹3,75,000
• Investment Selection:
• Stocks:
o ₹11,25,000 in an Nifty 50 index fund
o ₹11,25,000 in a technology sector ETF
• Bonds:
o ₹11,25,000 in a government bond fund or a fixed
deposit.
• Cash:
o ₹3,75,000 in a high-yield savings account or
liquid mutual fund for emergency funds.
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14. Example of Portfolio Construction
Portfolio
• Total Investment: ₹37,50,000
• Breakdown:
o ₹22,50,000 in stocks
o ₹11,25,000 in bonds
o ₹3,75,000 in cash
 Monitoring: Radhika checks her portfolio quarterly
and rebalances if any asset class deviates by more than
5% from the target allocation.
 Adjustments: If she changes jobs, she may increase
her contributions to retirement accounts.
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15. Structured table representing Radhika’s Investment Portfolio
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Summary of the Portfolio
• Total Investment: ₹37,50,000
• Risk Tolerance: Moderate
• Target Return: 6% annually
• Investment Goals: Retirement and home purchase in 5 years. This table
clearly illustrates Radhika’s portfolio structure, including the amounts
allocated to each investment type and their corresponding percentages of the
total portfolio.

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