Lesson 6 of 8 · All lessons in this module
- The investment policy statement: why and what
- Risk objectives and risk tolerance: ability vs willingnessVideo lesson
- Return objectives and the required returnVideo lesson
- Constraints: liquidity, horizon, tax, legal and unique circumstancesVideo lesson
- Asset classes and the strategic asset allocation
- Integrated case: IPS thresholds, client exclusions and the efficient frontier
- From SAA to portfolio: risk budgeting, TAA, selection and rebalancing
- ESG considerations in planning and construction
Lesson 6 of 8 · 15 min
Integrated case: IPS thresholds, client exclusions and the efficient frontier
An IPS usually gives a return floor and a risk cap rather than a utility function: the adviser tests candidate allocations against both, re-estimates any class the client restricts, and agrees a compromise when nothing fits.
In short
- An IPS supplies thresholds (minimum return, maximum risk) and constraints. The SAA is found by testing which attainable portfolios satisfy them, not by maximising a stated utility.
- A client exclusion narrows the universe. Re-estimate the affected class (normally lower return, higher risk) and the whole frontier shifts down and to the right; a restriction cannot improve it.
- A portfolio must pass both thresholds. Compute return as the weighted average and risk with the covariance terms of every pair.
- If no attainable portfolio meets both, show the closest achievable portfolios and agree an acceptable compromise, which is then recorded in the IPS.
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