Evaluate an institutional investor's investment policy statement

An institutional IPS should define the mission and objectives, the return target and risk tolerance, the constraints (liquidity, horizon, legal and regulatory, tax, unique circumstances), the strategic asset allocation with ranges and benchmarks, rebalancing policy, governance responsibilities, and reporting and review procedures. Evaluation checks internal consistency: is the return target achievable given the risk tolerance and allocation, is liquidity adequate for spending or benefits, and do constraints reflect the investor's regulation and liabilities? For an endowment, required return should cover spending, inflation and costs; for example, 5% spending, 2.5% inflation and 0.5% costs imply (1.05)(1.025)(1.005) − 1 ≈ 8.16%. A trap is accepting a return target that the allocation cannot plausibly deliver.