CFA Level IPortfolio ManagementMedium
A 55-year-old client tells her advisor that she must have $50,000 in cash available within the next six months to pay for her daughter's wedding. In constructing the client's Investment Policy Statement (IPS), this requirement is best classified as which type of constraint?
- AUnique circumstances constraint
- BTax constraint
- CTime horizon constraint
- DLiquidity constraint
Show answer & explanationAnswer & explanation
Correct answer: D. Liquidity constraint
A liquidity constraint refers to the need for cash to meet anticipated or unanticipated short-term spending needs. The requirement to access $50,000 within six months is a specific, near-term cash need and is therefore classified as a liquidity constraint, not a time horizon (which relates to the investment planning period) or unique circumstances.
Why the other options are wrong
- A. Unique circumstances cover unusual restrictions (e.g., ethical preferences), not routine cash needs.
- B. No tax implications are mentioned in the scenario.
- C. Time horizon refers to the overall investment planning period, not a specific near-term cash need.
IPS Constraints — Liquidity
Liquidity constraints identify the client's need for cash to meet spending needs, either anticipated (e.g., tuition, weddings) or unanticipated (e.g., emergencies).
- IPS constraints: liquidity, time horizon, taxes, legal/regulatory, unique circumstances
- Liquidity needs are typically expressed as a dollar amount and timeframe
- Distinct from time horizon, which reflects the investment holding period
Memory trick: Cash needed soon? Think Liquidity, not Long-term horizon.