Principles for drafting an investment policy with illustrations

Abstract

During the past few decades, significant theoretical advances in portfolio theory and asset pricing have substantially increased our understanding of how to construct optimal portfolios. These theoretical developments have challenged professional portfolio management to develop appropriate tools to incorporate these novel ideas. In this paper we contribute by focusing on the critical role of the investment policy as a tool that connects portfolio theory to portfolio management. We select, list, discuss and illustrate with examples several principles that are essential items of an investment policy.