FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationOpening and Maintaining Customer Accounts and Investment RecommendationsEasy
A client, age 35, has a high-paying job, no dependents, and a very aggressive risk tolerance. Their primary investment objective is long-term capital appreciation. Which of the following asset allocations would be MOST suitable for this client?
- A20% bonds, 80% stocks.
- B80% bonds, 20% stocks.
- C100% money market funds.
- D50% bonds, 50% stocks.
Show answer & explanationAnswer & explanation
Correct answer: A. 20% bonds, 80% stocks.
A client with a very aggressive risk tolerance and a primary objective of long-term capital appreciation should have a portfolio heavily weighted towards equities (stocks), as stocks generally offer the highest potential for growth over the long term, albeit with higher risk. A 20% bond, 80% stock allocation aligns with this profile.
Why the other options are wrong
- B. This allocation is too conservative for a client with an aggressive risk tolerance and capital appreciation objective.
- C. Money market funds are extremely conservative and offer no significant capital appreciation potential.
- D. This allocation is balanced, but not aggressive enough for the client's stated risk tolerance and objective.
Aggressive Asset Allocation
An investment strategy that emphasizes a higher proportion of growth-oriented assets, such as equities, to maximize capital appreciation over the long term.
- Typically suitable for investors with a long-term horizon and high-risk tolerance.
- Involves higher volatility and potential for larger losses in the short term.
- Common examples include 80% or more in stocks, with a smaller percentage in bonds or cash.
Memory trick: Aggressive means stocks, conservative means bonds, balanced is a mix, for all your funds.