Asset allocation in investment

6.1 The investment process

The following activity will allow you to explore a template for an investment policy statement as recommended by the CFA.

Activity 10 Investment policy statement template

Allow around 45 minutes for the reading and following activity.

What are the key elements to be included in a policy statement?

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Answer

The key elements of an investment policy statement are:

  • Scope and purpose
  • Governance issues
  • Investment, return and risk objectives
  • Risk management including performance and risk measurement plus a process for rebalancing.

We will discuss risk management issues in more depth in Unit 6.

An example of a long-term return objective is often given in real terms. Why do you think that is?

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Answer

The level of inflation current at the time of specifying the investment policy may be very different from levels of inflation experienced in the decades to come. Real return objectives neutralise this potential problem. See Section 3b of the CFA investment policy statement.

When using an investment policy statement, how can you ensure that a portfolio is sufficiently diversified?

Now look at some investment policies in action.