NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesEasy
A 30-year-old client with a high-risk tolerance and a long-term investment horizon is seeking to maximize capital appreciation. Which investment strategy would be MOST appropriate for this client?
- ABalanced portfolio with an equal split between large-cap equities and short-term government bonds.
- BCapital preservation strategy emphasizing money market instruments and certificates of deposit.
- CIncome-focused portfolio with a high allocation to investment-grade bonds.
- DGrowth-oriented portfolio with a significant allocation to equities, including emerging markets and small-cap stocks.
Show answer & explanationAnswer & explanation
Correct answer: D. Growth-oriented portfolio with a significant allocation to equities, including emerging markets and small-cap stocks.
For a young client with high-risk tolerance and a long-term horizon, a growth-oriented portfolio focused on equities offers the best potential for capital appreciation, accepting higher volatility for higher returns.
Why the other options are wrong
- A. A balanced portfolio is more conservative and would not maximize capital appreciation as effectively as a growth-oriented one.
- B. This strategy is for capital preservation and is highly conservative, not suitable for maximizing appreciation.
- C. This strategy is suitable for income generation and lower risk, not maximizing capital appreciation.
Growth Investment Strategy
An investment strategy focused on maximizing capital appreciation by investing in companies expected to grow at an above-average rate.
- Targets companies with high growth potential, often reinvesting earnings.
- Typically involves higher risk and volatility.
- Suitable for investors with a long-term horizon and higher risk tolerance.
Memory trick: Growth's long game, high stakes, high gain.