CHAPTER 18 Investment Policy Statement (IPS)

The Investment Policy Statement (IPS) is a critical document for investment advisors and consultants and their clients. It clearly defines the fund objectives, allowable asset classes, target asset allocation and benchmarks (when applicable), risk metrics and constraints, special restrictions, and rebalancing protocol. It also includes a description of the client's risk tolerance, time horizon, tax position, target rate of return (when applicable), liability policy (when applicable), monitoring requirements, capital markets expectations, spending policy, appropriate governance, and additional client constraints. This chapter takes a look at the more common components of the IPS and uses examples to show how investment professionals may analyze unique client situations and build an appropriate IPS under different circumstances.

Investments: Basics of Portfolio Planning and Construction

Learning Objectives

  • Explain the reasons for a written investment policy statement (IPS).
  • List and explain the major components of an IPS.
  • Discuss risk and return objectives, including their preparation.
  • Distinguish between the willingness and the ability (capacity) to take risk in analyzing an investor's financial risk tolerance.
  • Describe the investment constraints of liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances and their implications for the choice of portfolio assets.

Basics of Portfolio Planning ...

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