| Investment Policy Statement (IPS) | A written plan governing all investment decisions — objectives, constraints, guidelines, duties, and review schedule. Updated when circumstances change. |
| Risk objective (absolute) | A risk target expressed in absolute terms (e.g., “portfolio standard deviation shall not exceed 12%”). |
| Risk objective (relative) | A risk target expressed relative to a benchmark (e.g., “tracking error shall not exceed 2%”). |
| Return objective | The desired rate of return, which must be consistent with the risk objective. May be stated as nominal or real, pre-tax or post-tax. |
| Risk tolerance | The composite assessment of an investor’s willingness and ability to bear risk. When these conflict, the more conservative view prevails. |
| Ability to bear risk | The objective, financial capacity to endure losses — determined by wealth, income stability, time horizon, and liquidity needs. |
| Willingness to take risk | The subjective, psychological comfort with uncertainty and potential losses. |
| Liquidity (constraint) | The need to convert investments to cash quickly and at fair value. High near-term spending needs reduce liquidity tolerance. |
| Time horizon | The total period over which the portfolio is expected to be invested. Longer horizons generally allow greater risk-taking. |
| Asset class | A group of investments with similar risk-return characteristics and behavior (e.g., domestic equity, investment-grade bonds, real estate). |
| Strategic Asset Allocation (SAA) | Long-term policy weights for each asset class, reflecting the investor’s objectives and constraints. The primary driver of portfolio risk and return. |
| Tactical Asset Allocation (TAA) | Short-term tilts away from SAA to capture perceived mispricing or momentum, constrained by allowable ranges. |
| Core-satellite approach | Portfolio construction combining a passively managed “core” (bulk of assets, tracking benchmark) with actively managed “satellite” positions seeking alpha. |
| ESG investing | Incorporating Environmental, Social, and Governance factors into investment analysis and portfolio construction. |
| Negative screening | Excluding companies or sectors from the portfolio based on ESG criteria (e.g., excluding tobacco, weapons). |
| Positive screening | Actively selecting companies with superior ESG practices or ratings (tilting toward “best-in-class”). |
| Impact investing | Investing with the intention to generate measurable social or environmental impact alongside a financial return. |