CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction
An individual investor's IPS notes that he will need a large lump sum in eight months to buy a house, and that a recent inheritance of illiquid private company shares makes up most of his wealth. Which pair of constraints is most likely the key issue in his IPS?
Liquidity and time horizon are the key constraints. The investor needs a large sum in eight months, which is a short horizon for that portion, while most of his wealth is in illiquid shares, so the portfolio must hold enough liquid, low-risk assets to meet the cash need.
- ALiquidity and time horizonCorrect
- BTaxes and legal factors
- CUnique circumstances and regulation
Explanation
The near-term cash need creates a liquidity requirement and a short horizon for part of the portfolio, and the illiquid holdings worsen it. Tax, legal or regulatory issues are not the dominant facts given.
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