FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsHard
A client, age 72, is retired and lives on a fixed income. They have a moderately conservative risk tolerance and are looking for an investment that provides current income with some potential for modest capital appreciation, while minimizing exposure to significant market downturns. Which of the following investment types would be MOST suitable?
- AAn aggressive small-cap equity fund
- BA growth stock mutual fund
- CA balanced fund with a higher allocation to income-producing bonds
- DA variable annuity with a high equity subaccount allocation
Show answer & explanationAnswer & explanation
Correct answer: C. A balanced fund with a higher allocation to income-producing bonds
A balanced fund with a higher allocation to income-producing bonds aligns with the client's need for current income, moderately conservative risk tolerance, and desire for modest capital appreciation, while the bond component helps minimize exposure to significant market downturns.
Why the other options are wrong
- A. Aggressive small-cap equity funds are highly volatile and unsuitable for a retired client seeking income and capital preservation with a moderately conservative risk tolerance.
- B. Growth stock mutual funds are too aggressive for a retired client on fixed income with a moderately conservative risk tolerance, prioritizing appreciation over income and carrying high market risk.
- D. A variable annuity with a high equity subaccount allocation would expose the client to significant market risk, contradicting their desire to minimize exposure to downturns and their moderately conservative risk tolerance.
Balanced Portfolio Suitability
Balanced portfolios are suitable for investors seeking a mix of income and capital appreciation with moderate risk. They typically combine stocks for growth and bonds for income and stability, often adjusted based on specific client needs.
- Combines equity (for growth) and fixed income (for income/stability).
- Aims for moderate risk and return.
- Allocation can be adjusted based on client's specific risk tolerance and objectives.
- Suitable for investors seeking income, modest growth, and downside protection.
Memory trick: Moderately Conservative = BALANCE income and growth with a SAFETY net.