Asset Allocation

C is correct. Jennifer has a 37-year time horizon until retirement, high risk tolerance, and stable income with no dependents. An 85% stock allocation maximizes long-term growth potential while maintaining some bond exposure for diversification and rebalancing opportunities. This aggressive allocation is appropriate given her long time horizon to recover from market downturns.

A is too conservative for a 28-year-old with high risk tolerance and a 37-year time horizon; this allocation would be more suitable for someone nearing retirement. B is still conservative for her profile, typically suited for investors 10-15 years from retirement. D (100% stocks) eliminates diversification benefits and rebalancing opportunities; even aggressive portfolios typically maintain 10-15% in bonds for strategic rebalancing.

D is correct. Multiple academic studies have shown that asset allocation is responsible for approximately 90% or more of portfolio return variability over time. This research demonstrates that the decision of how to allocate among stocks, bonds, and cash is far more important than individual security selection or market timing.

A (40-50%) significantly underestimates the impact of asset allocation. B (60-70%) and C (75-85%) are both too low; while these percentages might represent the impact of other factors combined, asset allocation alone accounts for over 90% of return variability.

C is correct. Calculate target amounts: Stocks should be $240,000 × 70% = $168,000. Bonds should be $240,000 × 30% = $72,000. Current allocation: Stocks = $180,000, Bonds = $60,000. To rebalance: Sell $180,000 - $168,000 = $12,000 of stocks and buy $12,000 of bonds (bringing bonds from $60,000 to $72,000).

A ($6,000) incorrectly calculates half the required shift. B ($8,000) may result from calculation errors in determining the target amounts. D ($15,000) incorrectly uses the original portfolio value ($200,000 × 30% = $60,000) rather than the current portfolio value of $240,000.

D is correct (the EXCEPT answer). Asset allocation does NOT eliminate the need for diversification within each asset class. Asset allocation determines the percentage split among major asset classes (stocks, bonds, cash), while diversification spreads investments within each class (e.g., diversifying stock holdings across sectors, market caps, and geographies). Both are essential components of portfolio construction.

A is accurate: research demonstrates that asset allocation is responsible for over 90% of portfolio return variability. B is accurate: strategic asset allocation establishes long-term target percentages based on the client's objectives and constraints. C is accurate: tactical asset allocation involves making short-term adjustments to capitalize on perceived market opportunities, though this approach is more active than strategic allocation.

D is correct. All four statements support this asset allocation recommendation.

Statement 1 is TRUE: A 20-year time horizon provides sufficient time to weather market volatility and benefit from long-term equity growth, justifying the 65% stock allocation.

Statement 2 is TRUE: Stocks and bonds typically have an inverse correlation, meaning when stocks decline, bonds often hold steady or rise, providing portfolio stability and diversification benefits.

Statement 3 is TRUE: The 65/30/5 split represents a moderate allocation between aggressive (80%+ stocks) and conservative (40% stocks) portfolios, aligning with moderate risk tolerance.

Statement 4 is TRUE: The 5% cash allocation provides liquidity for unexpected needs and allows the adviser to execute rebalancing trades without forcing sales during unfavorable market conditions.