NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
An investment adviser is constructing a portfolio for a client who is primarily concerned with minimizing portfolio volatility and protecting against potential market downturns. The client is willing to accept lower returns in exchange for greater stability. Which of the following asset classes should the adviser primarily emphasize?
- AEmerging market equities.
- BSmall-cap growth stocks.
- CInvestment-grade fixed income.
- DHigh-yield corporate bonds.
Show answer & explanationAnswer & explanation
Correct answer: C. Investment-grade fixed income.
Investment-grade fixed income, such as highly-rated government or corporate bonds, is known for its lower volatility and greater capital preservation compared to equities. It aligns with a client's desire to minimize volatility, protect against downturns, and accept lower returns for stability.
Why the other options are wrong
- A. Emerging market equities are highly volatile and subject to significant political and economic risks, directly opposite to the client's objectives.
- B. Small-cap growth stocks are highly volatile and carry significant market downturn risk, contrary to the client's goals.
- D. High-yield corporate bonds (junk bonds) have higher default risk and greater price volatility than investment-grade bonds, not suitable for minimizing volatility.
Investment-Grade Fixed Income
Debt securities issued by highly creditworthy entities (governments, corporations) that have a low risk of default, offering greater capital stability and lower volatility compared to equities or high-yield bonds.
- Low default risk.
- Lower volatility compared to stocks.
- Focus on capital preservation and steady income.
- Credit ratings typically BBB- / Baa3 or higher.
Memory trick: For stability, choose fixed income, a calm harbor for your income!