NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesEasy
An investment adviser is constructing a portfolio for a client who is highly risk-averse and absolutely prioritizes avoiding any loss of their initial investment. The client has a short-term time horizon of 1-2 years. Which of the following investment objectives should the adviser prioritize?
- AAggressive Growth
- BCapital Preservation
- CSpeculation
- DIncome Generation
Show answer & explanationAnswer & explanation
Correct answer: B. Capital Preservation
For a highly risk-averse client with a short-term horizon who absolutely prioritizes avoiding any loss of their initial investment, Capital Preservation is the most appropriate investment objective. This means focusing on investments that protect the principal.
Why the other options are wrong
- A. Aggressive Growth involves high risk and potential for loss, unsuitable for a risk-averse client.
- C. Speculation involves very high risk and is the opposite of the client's risk aversion and desire for capital preservation.
- D. Income Generation might involve some risk to principal, and is not the absolute priority over avoiding loss.
Capital Preservation
An investment objective focused on protecting the principal amount of an investment from loss, even at the expense of higher returns. It is suitable for highly risk-averse investors or those with a short time horizon.
- Primary goal is to avoid loss of principal.
- Typically involves low-risk investments like T-bills, money market funds, or CDs.
- Returns are usually modest.
- Suitable for short-term goals or very conservative investors.
Memory trick: Objectives: What's the main 'target' for the money?