Series 7 Exam Question 259: Answer and Explanation

Question: 259

One of your 60-year-old clients has a portfolio that consists of 60% invested in stocks, 30% in bonds, and 10% in cash equivalents. Using a standard strategic asset allocation model, they should:

• A. sell some of their bonds and purchase more stocks
• B. sell some of their stocks and purchase more bonds
• C. sell their cash equivalents and purchase more stocks and bonds
• D. cannot be determined with the information given

Correct Answer: B

Explanation:

B. As investors age, they should start shifting more of their investments from stocks into bonds and cash equivalents such as money-market instruments. The thought is that older investors cannot afford to take as much risk. The standard asset allocation model suggests that you take 100 and subtract the person's age to determine the percentage that he should have invested in stocks. In this case, the investor is 60, so he should have 40% (100-60) invested in stocks and the balance in bonds and cash equivalents.