NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesEasy
A high-net-worth client with significant investment experience is interested in diversifying their portfolio beyond traditional stocks and bonds. They are comfortable with illiquidity and higher risk in exchange for potentially higher returns. Which of the following investment types would be most appropriate for this client?
- ALarge-cap mutual funds
- BMoney market funds
- CTreasury bonds
- DHedge funds
Show answer & explanationAnswer & explanation
Correct answer: D. Hedge funds
Hedge funds are considered alternative investments that typically cater to accredited, high-net-worth investors. They often involve complex strategies, higher risk, illiquidity, and the potential for higher returns, aligning with the client's stated preferences for diversification beyond traditional assets.
Why the other options are wrong
- A. Large-cap mutual funds are traditional equity investments, not offering diversification 'beyond traditional stocks and bonds' in the way the client desires.
- B. Money market funds are highly liquid and low-risk, suitable for capital preservation, not higher returns or diversification beyond traditional assets.
- C. Treasury bonds are fixed-income securities, representing traditional assets and are low-risk, not fitting the client's desire for higher risk/return and diversification beyond traditional assets.
Alternative Investments
Investments that are not traditional assets like stocks, bonds, or cash. They typically include hedge funds, private equity, real estate, commodities, and derivatives.
- Often less liquid than traditional investments.
- Can offer diversification benefits due to low correlation with traditional assets.
- Typically involve higher fees and risks.
- Often restricted to accredited or institutional investors.
Memory trick: Think beyond the basic 'stocks and bonds' box for 'alternative' options.