This lesson covers the practical process of building and managing an investment portfolio.

3.1 Strategic Asset Allocation

The strategic asset allocation is the process of dividing the portfolio among different asset classes based on the organisation’s long-term investment objectives, risk tolerance, and liquidity needs . This is a critical decision that determines the portfolio’s risk and return profile . The IPS typically sets the strategic asset allocation.

3.2 Diversification and Risk Management

A core principle of portfolio construction is diversification. By spreading investments across different issuers, sectors, and maturities, a treasurer can reduce the portfolio’s overall risk without sacrificing expected return . Diversification reduces the impact of a single default or price movement on the entire portfolio .

3.3 Tactical Asset Allocation

In some cases, treasurers may make tactical adjustments to the portfolio’s allocation to take advantage of short-term market opportunities. However, this should be done within the limits defined in the IPS and with a clear understanding of the risks involved . The primary focus of treasury investing should remain on safety and liquidity, not speculation.