Abstract
Constructing a multi-asset class portfolio is a complex process that can involves up to three levels of decisions: asset allocation, manager selection and weighting, and security selection and weighting. At each decision level, asset classes, mangers, or securities are combined to obtain the combination of risk and expected return that best fits with the goals for the portfolio. This chapter shows: (1) how to form an asset allocation based upon risk, expected return, and risk preferences, (2) how to form a portfolio of managers (including inhouse asset management) based on risk-adjusted expected excess returns (alphas) and active risk, using the asset allocation as a benchmark, and (3) how to forms portfolios of securities. The chapter also offers practical considerations to student-managed investment funds in constructing a portfolio for various objectives.
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