64 - Portfolio Planning

Question 1

An individual investor specifies to her investment advisor that her portfolio must produce a minimum amount of cash each period. This investment constraint is best classified as:

Answer 1

Liquidity constraints arise from an investor’s need for spendable cash.

Question 2

An investment manager is most likely to be engaging in tactical asset allocation if she:

Answer 2

Tactical asset allocation is deviating from a portfolio’s strategic asset allocation because an asset class or sector is perceived to be mispriced in the short term. Establishing and updating target weights for asset classes based on the investor’s objectives and constraints is strategic asset allocation.

Question 3

Which of the following statements about investment constraints is least accurate?

Answer 3

Investors with a time horizon constraint may have little time for capital appreciation before they need the money. Need for money in the near term is a liquidity constraint. Time horizon and liquidity constraints often go hand in hand. Diversification often requires the sale of an investment and the purchase of another. Investment sales often trigger tax liability. Younger investors should take advantage of tax deferrals while they have time for the savings to compound, and while they are in their peak earning years. Many retirees have little income and face less tax liability on investment returns.