CFA Level II ExamPortfolio Management and Wealth PlanningEasy
A client, Mr. Henderson, is a 65-year-old retired executive with a substantial investment portfolio. He expresses concern about potential large market downturns and wishes to preserve capital while still generating some income. He has no immediate liquidity needs beyond his current living expenses, which are covered by his pension. His investment horizon is long-term, as he plans to leave a significant inheritance to his grandchildren. Which of the following investment policy statement (IPS) objectives is most appropriate for Mr. Henderson?
- AAggressive growth with a focus on capital appreciation.
- BModerate growth with a balanced risk-return profile.
- CHigh current income with a tolerance for moderate capital loss.
- DCapital preservation with a secondary focus on current income.
Show answer & explanationAnswer & explanation
Correct answer: D. Capital preservation with a secondary focus on current income.
Mr. Henderson's primary concern is capital preservation, as he is retired and wishes to leave an inheritance. His need for income is secondary, covered by his pension, and he explicitly expresses concern about large market downturns.
Why the other options are wrong
- A. This objective is too aggressive for a retired individual primarily concerned with capital preservation and inheritance.
- B. While moderate, his expressed concerns lean more towards preservation than moderate growth, especially with the inheritance goal.
- C. High current income often comes with higher risk to capital, which contradicts his desire for capital preservation.
Investment Policy Statement (IPS) Objectives
The IPS outlines the client's investment goals, risk tolerance, and constraints, providing a framework for investment decisions. Objectives typically balance risk and return.
- Primary objective defines the main goal (e.g., capital preservation, growth, income).
- Secondary objective supports the primary one.
- Must align with client's specific circumstances, time horizon, and risk tolerance.
Memory trick: IPS: Your Personal Investment Compass Setting.