What is the 7 steps of capital market expectations in the portfolio management process?

Short answer: I made this flow chart as follows:

image-20240120132220168

Long answer: I wrote some funny story to help you remember it.

Step 1: The Time-Traveling Investor Imagine an investor who's a time traveler. They need to pick assets like a kid in a candy store, but they can only choose from the shelves (asset classes) they can reach (investment horizon). They've got a time machine (time horizon), which is super important because it tells them which candy era (capital market expectations) they're shopping in!

Step 2: The Historical Detective Next, our investor turns into a detective, looking back at the history of candy (assets). They're trying to figure out why chocolate was popular in the '80s (past performance drivers) and if gummy bears will be the next big thing (future performance). They use their magnifying glass (analysis) to see if their candy predictions make sense or if they're just sugar-high dreams.

Step 3: The Valuation Chef Now, they're a chef deciding on a recipe (valuation model). But wait! The recipe that works for an American apple pie might not work for an exotic fruit salad from an emerging market. They need the right ingredients (model requirements) for their dish.

Step 4: The Data Treasure Hunt Armed with a map, our investor goes on a treasure hunt for the most sparkly, accurate treasure (data). They avoid the fake jewels (faulty data) and head to the treasure troves (financial publications and databases) for the real gems.

Step 5: The Investment Wizard Time to put on a wizard's hat! They use their magic (experience and judgment) to conjure up the right spells (values for inputs) for their investment potion. But they have to make sure all their magical ingredients (inputs) are harmonious, or the potion might backfire!

Step 6: The Capital Market Fortune Teller Now, they're a fortune teller, gazing into their crystal ball (formulate expectations) to predict the future of the market. They jot down their visions (assumptions and rationales) in their mystical ledger for future reference.

Step 7: The Performance Gardener Finally, our investor becomes a gardener. They plant their investment seeds and watch them grow (monitor performance). If a plant (investment) isn't growing as expected, they tweak their gardening technique (refine the process and model).