Time Horizon

D is correct. With only a 2-year time horizon for the college funding goal, preservation of capital is critical. A 10% stock, 90% bond and cash allocation minimizes volatility risk and ensures funds will be available when tuition payments begin. A 2-year horizon is too short to recover from potential equity market downturns.

A (80% stocks) is far too aggressive for a 2-year horizon and would be more appropriate for the 20-year retirement goal. B (60% stocks) is still too aggressive, exposing the college fund to significant short-term volatility. C (30% stocks) reduces risk but still maintains more equity exposure than appropriate for such a short time horizon. The key exam concept: Each goal has its own time horizon and requires a separate allocation strategy.

B is correct. Longer time horizons increase risk capacity by providing sufficient time to weather market volatility and recover from downturns. Historical data shows that equity markets, despite short-term volatility, have positive expected returns over longer periods (10+ years). This extended timeframe allows investors to accept higher equity allocations and benefit from the equity risk premium.

A incorrectly suggests longer horizons decrease risk capacity. while more time creates more uncertainty, it also provides more opportunity to recover from temporary losses. C is incorrect because time horizon is a fundamental component of risk capacity, independent of the client's psychological risk tolerance. D is backwards. shorter time horizons decrease risk capacity because there is insufficient time to recover from market declines, requiring more conservative allocations.

C is correct. Client B has a significantly longer effective time horizon because the portfolio is earmarked for grandchildren (potentially 30-50 years), not for immediate living expenses. This extended horizon allows for more aggressive allocation despite the client being 68 years old. Client A needs the portfolio for immediate income, creating a short time horizon requiring conservative allocation to ensure funds are available for annual withdrawals.

A makes the common error of equating age with time horizon. Age alone does not determine time horizon; the timing of when funds are needed is what matters. B is backwards. higher liquidity needs (Client A's annual withdrawals) require more conservative allocations, not aggressive ones, to ensure capital preservation. D ignores time horizon entirely. high net worth provides greater risk capacity in terms of loss tolerance, but time horizon still dictates appropriate allocation based on when funds are needed.

D is correct (the EXCEPT answer). Historical portfolio performance is NOT a consideration when determining time horizon. Time horizon is about the future period until funds are needed, not past investment results. Past performance does not affect when a client needs money or how long assets can remain invested.

A is a core consideration: the fundamental definition of time horizon is when funds will be accessed (home purchase, college, retirement, etc.). B is important: investing for young beneficiaries extends time horizon significantly compared to personal use, as seen with estate planning scenarios. C is relevant: while age alone doesn't determine time horizon, it often correlates with major life events (retirement, education funding) that define when funds are needed. However, the exam tests that age must be combined with specific goals to determine true time horizon.

A is correct. Only statements 1 and 4 are accurate.

Statement 1 is TRUE: A 30-year time horizon until retirement is considered long-term, allowing Sarah to accept significant equity exposure (80-90% stocks) because she has three decades to weather market volatility and benefit from long-term equity growth.

Statement 2 is FALSE: While technically Sarah will need retirement funds for 25-30 years after retirement, the primary time horizon for accumulation purposes is measured until the retirement date when withdrawals begin (30 years from now). Once in retirement, the portfolio time horizon and allocation strategy would be reassessed based on withdrawal needs and remaining life expectancy.

Statement 3 is FALSE: High income does not shorten time horizon. Time horizon is solely about when money is needed, not how quickly it can be accumulated. High income may increase risk capacity in other ways (ability to recover from losses through additional savings), but it does not change when retirement funds will be needed.

Statement 4 is TRUE: A 30-year horizon explicitly supports accepting short-term volatility in pursuit of higher expected long-term returns. This is the core principle of matching time horizon to allocation. temporary market declines can be weathered over such an extended period.