Overview of Asset Allocation

Correct Answer: A balanced strategy allocating 50% to equities, 35% to fixed income, 10% to alternative investments, and 5% to cash, providing a mix of growth potential and stability aligned with Jessica's moderate risk tolerance and long-term investment horizon.

The balanced strategy allocating 50% to equities, 35% to fixed income, 10% to alternative investments, and 5% to cash is the most suitable for Jessica given her circumstances. Here's why: - Jessica has a moderate risk tolerance, and this strategy provides a mix of growth potential from equities and stability from fixed income, aligning with her risk profile. - With a 25-year investment horizon until retirement, Jessica has sufficient time to benefit from the long-term growth potential of equities while mitigating short-term volatility through fixed income and alternative investments. - The inclusion of alternative investments and a small cash allocation adds diversification and liquidity to the portfolio. - This strategy balances Jessica's desire for a steady income stream with her goal of preserving capital for retirement. The aggressive strategy is less suitable because: - The high allocation to equities and focus on maximizing growth may not align with Jessica's moderate risk tolerance and desire for a steady income stream. - The lower fixed income allocation may not provide sufficient stability and income generation. The conservative strategy is less suitable because: - The high allocation to fixed income and cash may not provide enough long-term growth potential to meet Jessica's retirement goals over a 25-year horizon. - The lower equity allocation may not adequately capture market opportunities and potentially hinder the portfolio's ability to outpace inflation over the long term.

Correct Answer: Given Jennifer's moderate risk tolerance, long-term investment horizon, and dual goals of saving for a down payment and retirement, a balanced asset allocation strategy with a slight tilt towards equities would be most appropriate. This strategy would involve investing approximately 60% of her portfolio in a diversified mix of global equities, including both developed and emerging markets, to capture long-term growth potential. The remaining 40% would be allocated to fixed-income securities, such as investment-grade corporate bonds and government bonds, to provide stability and income. This balanced approach would allow Jennifer to participate in the growth potential of equity markets while maintaining a buffer against short-term volatility through her fixed-income allocation. Additionally, the inclusion of international equities would provide further diversification benefits and exposure to a wider range of economic conditions and growth opportunities.

The most appropriate asset allocation strategy for Jennifer would be a balanced approach with a slight tilt towards equities, as described in the first answer. Jennifer has a moderate risk tolerance and a long-term investment horizon, with goals of saving for a down payment on a house within 5-7 years and building a retirement nest egg. The balanced strategy, which allocates approximately 60% to a diversified mix of global equities and 40% to fixed-income securities, aligns well with her risk profile and objectives. The equity portion of the portfolio will provide long-term growth potential, while the fixed-income allocation offers stability and income. The inclusion of international equities further diversifies the portfolio and exposes it to a wider range of economic conditions and growth opportunities. The second answer, which suggests an aggressive asset allocation strategy focused primarily on equities, may be too risky for Jennifer's moderate risk tolerance. While it could potentially lead to higher long-term returns, it may expose her portfolio to excessive short-term volatility. The third answer, which proposes a conservative asset allocation strategy with a focus on capital preservation, may be too conservative for Jennifer's long-term goals. While it prioritizes stability, it may not provide sufficient growth potential to meet her retirement savings objectives over the long term. Therefore, the balanced asset allocation strategy with a slight tilt towards equities is the most suitable approach for Jennifer, considering her risk tolerance, investment timeline, and financial goals.

Correct Answer: Given David's moderate risk tolerance, long-term investment horizon, and the need to balance growth and stability, a suitable asset allocation strategy would be to invest 60% in stocks (both domestic and international), 30% in bonds (corporate and government), and 10% in alternative investments such as real estate investment trusts (REITs) or commodities. This allocation provides exposure to growth-oriented assets while maintaining a level of stability through fixed-income investments.

The best answer for David's situation is to invest 60% in stocks (both domestic and international), 30% in bonds (corporate and government), and 10% in alternative investments such as REITs or commodities. This allocation aligns with David's moderate risk tolerance and long-term investment horizon while balancing growth and stability. The 60% allocation to stocks provides exposure to growth-oriented assets, which is essential for meeting his retirement and college funding goals. The 30% allocation to bonds offers stability and income generation, helping to mitigate overall portfolio risk. The 10% allocation to alternative investments adds diversification and potential for enhanced returns. The other two options are less suitable for David's situation. The aggressive allocation of 80% in stocks, primarily in small-cap and emerging markets, along with speculative investments like cryptocurrencies, does not align with his moderate risk tolerance. This allocation may expose David to excessive risk and volatility. On the other hand, the conservative allocation of 50% in bonds, 30% in dividend-paying stocks, and 20% in cash equivalents prioritizes capital preservation and income generation. While this allocation provides stability, it may not provide sufficient growth potential to meet David's long-term goals of securing a comfortable retirement and funding his children's college education.