IAR Client Investment Recommendations & Strategies 4

Question 1

Under the prudent investor standard, an IAR managing a discretionary account must evaluate investments primarily based on:

Accepted Answer

The role each investment plays within the total portfolio context

Answer

The prudent investor standard requires evaluating how each investment contributes to total portfolio risk and return, not assessing securities in isolation.

Question 2

A client with no emergency fund wants to invest all liquid savings in illiquid private equity. What concern should the IAR raise?

Accepted Answer

The client may need to liquidate at a loss if an emergency arises, as private equity lacks liquidity

Answer

Without an emergency fund, the client risks being forced to sell illiquid assets at unfavorable terms in a crisis, violating the liquidity component of suitability.

Question 3

Which strategy is specifically designed to fund a known future liability, such as a child's college tuition in 10 years?

Accepted Answer

Asset-liability matching or liability-driven investing

Answer

Liability-driven investing (LDI) matches the duration and cash flows of assets to a specific future obligation, minimizing the risk of a funding shortfall.

Question 4

A client in the distribution phase of retirement asks about sequence-of-returns risk. An IAR should explain that this risk refers to:

Accepted Answer

The risk that poor early returns combined with withdrawals can permanently deplete a portfolio

Answer

Sequence-of-returns risk describes how early portfolio losses during the withdrawal phase, compounded by ongoing distributions, can permanently reduce account value even if long-run returns are average.

Question 5

Which of the following is a key difference between tactical and strategic asset allocation?

Accepted Answer

Tactical allocation allows short-term deviations from the strategic target to exploit market opportunities

Answer

Tactical asset allocation involves making short-term, opportunistic adjustments away from the long-term strategic target in response to market conditions.

IAR Practice Test

IAR Practice Test

IAR Client Investment Recommendations & Strategies 4