NASAA Series 65, Uniform Investment Adviser Law ExaminationClient Investment Recommendations and StrategiesEasy
A client inherited a substantial sum and wants to invest it to generate a steady stream of income to cover their living expenses. They are moderately risk-averse and prioritize consistent cash flow over aggressive capital appreciation. Which type of portfolio would be most suitable for this client?
- AIncome-Oriented Portfolio
- BAggressive Growth Portfolio
- CGrowth Portfolio
- DCapital Appreciation Portfolio
Show answer & explanationAnswer & explanation
Correct answer: A. Income-Oriented Portfolio
An income-oriented portfolio is designed to generate a steady stream of cash flow through investments like bonds, dividend-paying stocks, and real estate, which perfectly aligns with the client's goal of covering living expenses and prioritizing consistent cash flow over aggressive capital appreciation.
Why the other options are wrong
- B. An Aggressive Growth Portfolio involves high risk and aims for maximum capital appreciation, which is contrary to the client's moderate risk aversion and income priority.
- C. A Growth Portfolio primarily focuses on capital appreciation and may not provide the consistent income stream the client needs.
- D. A Capital Appreciation Portfolio is synonymous with a Growth Portfolio, focusing on increasing the investment's value rather than generating income.
Income-Oriented Portfolio
A portfolio strategy focused on generating a regular and consistent stream of income, typically from dividends, interest, or rental income, rather than aggressive capital appreciation.
- Primary goal is consistent cash flow.
- Common investments include dividend stocks, bonds, REITs, preferred stocks.
- Suitable for retirees or those needing to cover living expenses.
- Often involves lower risk than growth-focused portfolios.
Memory trick: Income portfolio: It's all about the 'cash flowing' in, like a steady stream.