A Canadian client is reviewing their Investment Policy Statement (IPS) with their advisor. The IPS states that the portfolio should target an overall correlation to the S&P/TSX Composite Index of no more than 0.70. Which element of the IPS does this specific target primarily address?

Question: A Canadian client is reviewing their Investment Policy Statement (IPS) with their advisor. The IPS states that the portfolio should target an overall correlation to the S&P/TSX Composite Index of no more than 0.70. Which element of the IPS does this specific target primarily address?

Answer options:

• Investment objectives. ✅ Risk tolerance.
• Time horizon.
• Constraints.

Correct answer: Risk tolerance.

Explanation: A target for portfolio correlation to a benchmark is directly related to the client's willingness to accept market-related volatility, which is a key aspect of their risk tolerance. Lower correlation generally implies lower systematic risk exposure relative to the benchmark.