Accredited Wealth Management Advisor Practice Exam

If a client has a time horizon of one to five years, which asset is most appropriate?

1. Common stocks.

2. Foreign stocks.

3. Money market mutual funds.

4. Short-term bonds.

The correct answer is: Short-term bonds.

When considering a client's time horizon of one to five years, choosing short-term bonds is appropriate due to several key factors. Short-term bonds typically have maturities of one to three years and are less volatile than longer-term bonds or equities. This aligns well with the relatively brief investment time horizon, as it minimizes the risk of price fluctuations that could occur if the market were to decline before the client needs to access their funds. Investors who align their assets with their time horizon often aim to preserve capital while still potentially earning a modest return. Short-term bonds can offer better returns than cash equivalents while maintaining a focus on capital preservation, making them suitable for an investment period that isn't too far into the future. The other options, such as common stocks or foreign stocks, inherently carry higher risks and volatility due to their exposure to market fluctuations, which may not be suitable for a shorter time horizon. Money market mutual funds do provide liquidity and safety, but their returns are generally lower than those of short-term bonds, making them less optimal for an investor seeking better yield over a period of one to five years.