NASAA Series 66 Uniform Combined State Law ExaminationClient Investment Recommendations and StrategiesMedium
An investment adviser is constructing a portfolio for a client who is primarily concerned with preserving their initial capital and generating a modest, stable income. The client has a very low risk tolerance and a short-to-medium time horizon. Which asset class would be most suitable for the largest portion of this client's portfolio?
- ACommodities futures
- BHigh-yield corporate bonds
- CInvestment-grade fixed income
- DSmall-cap growth stocks
Show answer & explanationAnswer & explanation
Correct answer: C. Investment-grade fixed income
Investment-grade fixed income, such as highly-rated government or corporate bonds, is characterized by low default risk, capital preservation, and stable income, making it ideal for a client with a low risk tolerance and a primary goal of preserving capital.
Why the other options are wrong
- A. Commodities futures are highly speculative and volatile, posing significant capital risk.
- B. High-yield (junk) bonds carry significant default risk and are unsuitable for capital preservation.
- D. Small-cap growth stocks are highly volatile and carry substantial capital risk, directly opposing the client's objective.
Capital Preservation Portfolio
An investment strategy focused on minimizing the risk of loss of the initial investment, typically by investing in very conservative, low-volatility assets.
- Primary goal is to protect principal.
- Favors low-risk assets like T-bills, investment-grade bonds, cash equivalents.
- Generates modest returns, often used for short-term needs or very conservative investors.
Memory trick: Objectives: What do you want your money to DO?