LO 66.1: Distinguish among the inputs to the portfolio construction process.

LO 66.1: Distinguish among the inputs to the portfolio construction process.
The process of constructing an optimal investment portfolio requires several inputs: Current portfolio: The assets and their weights in the current portfolio. Relative to the
other inputs, the current portfolio input can be measured with the most certainty.
Alphas: The expected excess returns of portfolio stocks (relative to their expected returns).
This input is subject to forecast error and bias.
Covariances’. Estimates of covariances are subject to estimation error.
Transaction costs: Transaction costs are estimated and increase as more frequent portfolio changes are made.
Active risk aversion’. Refers to the strength of the preference for lower volatility of the
difference between actively managed portfolio returns and benchmark portfolio returns.

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