# The Investor Policy Statement

The IPS is the document that governs how an investor’s portfolio is managed.

- Designing an IPS is a critical part of the Planning phase of the portfolio management process.
- The IPS will bring together an investor’s objectives and constraints (see below) to create a logical investment strategy.

## Investment Objectives

The investment objectives of an IPS are specific and quantified statements regarding risk and return for the portfolio's investment time horizon.

Risk Objective

The Risk Objective is commonly quantified by standard deviation of returns and this value is based on both the investor's willingness and ability to bear risk.

Even though a client may be very willing to assume risk, he/she may be unable to bear risk.

Risk factors include: spending needs to be funded by the portfolio, the client's level of wealth, and the client's overall financial situation.

Return Objective

A relationship exists between risk and return, so the Return Objective is a realistic goal for returns based on the degree of risk that a client is willing and able to absorb.

It will be important for a portfolio manager to consider: current spending in relation to long term wealth accumulation needs; the inflation impacts on spending needs; and whether or not the expected return is sufficient based on the client's needs.

## Investment Constraints

- The Investment Constraints of an IPS outline any client specified (internal) or external constraints or considerations for the portfolio.
- The 5 Types of Investment Constraints

- Investment Time Horizon
- Taxes
- Liquidity Needs
- Legal and Regulatory Constraints
- Investor Unique Circumstances

## Importance of Capital Market Expectations

- Formulating capital market expectations is a critical component of the Planning Phase.
- The portfolio manager will forecast expected returns and standard deviations for the asset classes and the correlations between asset classes.
- Capital markets expectation data will help inform the strategic asset allocation and will be considered within the context of the objectives and constraints of the portfolio.

## Investment Time Horizon

- The time horizon is the period over which the portfolio objectives are to be achieved.
- An investor's time horizon can consist of multiple periods.
- While there are exceptions, a longer time period typically increases the investor's ability to absorb risk.
- Directionally, less than three years could be considered a short time horizon and greater than ten years could be considered a long-term time horizon.

- CFA Level 2: Portfolio Management – Introduction
- Mean-Variance Analysis Assumptions
- Expected Return and Variance for a Two Asset Portfolio
- The Minimum Variance Frontier & Efficient Frontier
- Diversification Benefits
- The Capital Allocation Line – Introducing the Risk-free Asset
- The Capital Market Line
- CAPM & the SML
- Adding an Asset to a Portfolio – Improving the Minimum Variance Frontier
- The Market Model for a Security’s Returns
- Adjusted and Unadjusted Beta
- Multifactor Models
- Arbitrage Portfolio Theory (APT) – A Multifactor Macroeconomic Model
- Risk Factors and Tracking Portfolios
- Markowitz, MPT, and Market Efficiency
- International Capital Market Integration
- Domestic CAPM and Extended CAPM
- Changes in Real Exchange Rates
- International CAPM (ICAPM) - Beyond Extended CAPM
- Measuring Currency Exposure
- Company Stock Value Responses to Changes in Real Exchange Rates
- ICAPM vs. Domestic CAPM
- The J-Curve – Impact of Exchange Rate Changes on National Economies
- Moving Exchange Rates and Equity Markets
- Impacts of Market Segmentation on ICAPM
- Justifying Active Portfolio Management
- The Treynor-Black Model
- Portfolio Management Process
- The Investor Policy Statement

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