Asset Allocation for Moderate Risk Tolerance

Medium Investment Policy And Allocation Asset Allocation

Sarah is a portfolio manager who has been tasked with developing an investment policy statement (IPS) for a new client, Mr. Thompson. Mr. Thompson is a 45-year-old individual with a moderate risk tolerance, planning to retire in 20 years. He expects to need a retirement fund that generates an annual return sufficient to support his desired lifestyle after retirement. To ensure his portfolio aligns with his financial goals and risk profile, Sarah must consider different asset classes and their expected returns.

After analyzing Mr. Thompson's situation, Sarah is contemplating the following asset allocation strategy: 60% equity, 30% fixed income, and 10% cash. Which of the following statements accurately describes the implications of this asset allocation strategy?

The strategy is overly aggressive for a moderate risk tolerance, potentially leading to increased volatility.

The strategy maintains a balanced approach that can achieve growth while managing risk appropriately.

The strategy does not allocate enough to cash, exposing Mr. Thompson to liquidity risk.

Hint

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