CFA Level I · CFA Level I Exam · Basics of Portfolio Planning and Construction
An investor aged 35 saves for retirement at age 65 and has stable employment and no near-term cash needs. Relative to a retiree who needs to fund living expenses, the investor's time horizon constraint most likely:
A long time horizon permits a greater allocation to long-term, less liquid assets. With 30 years until retirement and no near-term cash needs, the investor can tolerate illiquidity and short-term volatility in pursuit of higher expected returns, unlike a retiree who must fund current spending.
- Alimits the portfolio to short-term, high-liquidity assets
- Bhas little effect because horizon matters only for institutions
- Cpermits a greater allocation to long-term, less liquid assetsCorrect
Explanation
A long time horizon generally allows the investor to hold assets with higher expected return and lower liquidity, and to recover from short-term volatility. Short-horizon investors need more liquid, stable assets. Horizon is relevant to individuals as well as institutions.
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