CFA Level II ExamPortfolio Management and Wealth PlanningEasy
A financial advisor is discussing asset allocation with a 30-year-old client who has a high-risk tolerance and a very long investment horizon for retirement. The client is comfortable with significant market fluctuations in pursuit of maximum long-term growth. Which of the following asset allocation strategies would be most appropriate for this client?
- AA portfolio focused on capital preservation with inflation-protected securities.
- BA balanced portfolio with equal weightings in equities, fixed income, and real estate.
- CA portfolio heavily weighted towards fixed income and cash.
- DA portfolio with a high allocation to equities, including growth and international stocks.
Show answer & explanationAnswer & explanation
Correct answer: D. A portfolio with a high allocation to equities, including growth and international stocks.
A 30-year-old client with a high-risk tolerance and a very long investment horizon seeking 'maximum long-term growth' is best served by a portfolio with a high allocation to equities. Equities historically offer the highest long-term returns but also come with higher volatility, which is acceptable given the client's profile.
Why the other options are wrong
- A. This strategy prioritizes capital preservation, which contradicts the client's goal of maximum long-term growth and high-risk tolerance.
- B. A balanced portfolio is more moderate, not optimized for 'maximum long-term growth' given the client's profile.
- C. This strategy is suitable for low-risk tolerance or short-term horizons, not aggressive growth.
Asset Allocation for Long-Term Growth
For investors with a long time horizon and high-risk tolerance, an asset allocation strategy typically emphasizes growth-oriented assets, primarily equities, to maximize long-term capital appreciation.
- Equities offer the highest long-term return potential but also higher volatility.
- Long horizons allow time to recover from market downturns.
- High-risk tolerance means comfort with short-term fluctuations.
Memory trick: Client Profile: Your Investment Recipe.