NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesMedium
An investment adviser is constructing a portfolio for a young client with a long investment horizon (30+ years) and a high-risk tolerance. The client's primary goal is aggressive capital appreciation. Which of the following asset allocations would be most suitable?
- A50% real estate, 50% commodities
- B80% bonds, 20% equities
- C90% equities, 10% cash/short-term bonds
- D60% equities, 40% bonds
Show answer & explanationAnswer & explanation
Correct answer: C. 90% equities, 10% cash/short-term bonds
For a young client with a long investment horizon and high-risk tolerance aiming for aggressive capital appreciation, a portfolio heavily weighted towards equities is most suitable. Equities historically offer the highest growth potential over long periods, though with higher volatility. A small allocation to cash or short-term bonds provides minimal liquidity.
Why the other options are wrong
- A. While real estate and commodities can offer growth, a 50/50 split is not typically considered the most direct path to aggressive capital appreciation compared to a high equity allocation, and commodities can be highly volatile.
- B. This allocation is too conservative for aggressive capital appreciation and a high-risk tolerance.
- D. While equity-heavy, 60% equities is still moderate for a client seeking aggressive growth with a long horizon.
Aggressive Capital Appreciation
An investment objective focused on maximizing portfolio growth over the long term, typically involving high-risk assets like equities.
- Suitable for investors with a long time horizon and high-risk tolerance.
- Prioritizes growth over income or capital preservation.
- Often involves a high allocation to growth stocks, small-cap stocks, or emerging markets.
Memory trick: Allocation is about 'FIT': Financial goals, Investor profile, Time horizon.