Canadian Securities Course (CSC) Level 2 Practice Exam

Which step in the portfolio management process involves operating rules and investment objectives and constraints?

1. Develop asset mix

2. Select securities

3. Design IPS

4. Rebalance

The correct answer is: Design IPS

The correct answer is indeed to design the Investment Policy Statement (IPS). This step is crucial as it sets the foundation for a portfolio management strategy by outlining clear operating rules, investment objectives, and constraints that guide the investment process. The IPS acts as a roadmap that informs how assets should be allocated based on the investor’s goals, risk tolerance, time horizon, and other personalized factors. The design of the IPS ensures that all decisions made in subsequent steps, such as asset allocation and security selection, are aligned with the established investment strategy. Having a well-structured IPS is essential for maintaining consistency and discipline in achieving the desired investment outcomes. The other steps encompass different aspects of portfolio management but do not focus specifically on defining the overarching rules and objectives. Developing asset mix involves allocating funds among various asset classes without the detailed guideline that the IPS provides. Selecting securities is the process of choosing specific investments within the context of the broad strategy set forth in the IPS. Rebalancing pertains to adjusting the portfolio back to its target asset mix, which falls under ongoing management rather than the initial establishment of objectives and rules.