A client, age 55, is seeking an investment that provides steady income, moderate capital appreciation, and diversification within their existing equity-heavy portfolio. They are comfortable with moderate risk. Which of the following would be MOST suitable?
- AAn aggressive growth mutual fund focused on emerging markets.
- BA portfolio composed primarily of speculative penny stocks.
- CA commodities futures contract.
- DA diversified portfolio of investment-grade municipal bonds.
Show answer & explanationAnswer & explanation
Correct answer: D. A diversified portfolio of investment-grade municipal bonds.
The client seeks steady income, moderate capital appreciation, diversification, and is comfortable with moderate risk. Investment-grade municipal bonds provide steady, often tax-exempt income, and can offer moderate appreciation potential, while also diversifying an equity-heavy portfolio. Penny stocks, emerging market funds, and commodities futures are all too aggressive or volatile for a client with moderate risk tolerance seeking steady income and diversification.
Why the other options are wrong
- A. Aggressive growth funds in emerging markets are too risky and volatile for a client with moderate risk tolerance seeking steady income.
- B. Penny stocks are highly speculative and unsuitable for a client seeking steady income and moderate risk.
- C. Commodities futures are highly speculative and unsuitable for a client seeking steady income and moderate risk.
Moderate Risk Income & Diversification
For clients seeking steady income, moderate capital appreciation, and diversification with moderate risk, investment-grade bonds (corporate or municipal) and balanced mutual funds are often suitable choices.
- Focus on stable income generation.
- Balance risk with potential for growth.
- Good for diversifying equity-heavy portfolios.
- Avoid highly speculative or volatile investments.
Memory trick: Balance your portfolio with steady bonds for income and diversification.