Final answer:
Option C (50% large-cap stock fund, 40% municipal bond fund, 10% money market fund) best suits the client's needs due to its mixed approach that offers growth, stability, and short-term liquidity.
Step-by-step explanation:
Considering the client's age, willingness to accept moderate risk, and the short-term need for liquidity, the best asset allocation strategy would be Option C: 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund. This blend offers growth potential through large-cap stocks, stability, and possible tax advantages with municipal bonds, and the necessary liquidity to access $10,000 in six months via the money market fund.
The allocation to stocks provides the higher potential for growth as stocks typically yield higher average returns over time compared to savings accounts or bonds. Having a portion in municipal bonds offers lower risk and potential tax benefits, appealing for moderate risk tolerance. Moreover, the money market fund is essential to ensure the $10,000 remains accessible for the house down payment within a low-risk environment, which is suitable when the money is needed in the short term.
The fear that high-risk investments correspond to low returns is not necessarily true; high-risk may lead to high potential returns, though with greater volatility. By balancing the portfolio with stocks and bonds, and keeping a portion in a money market fund, the suggested strategy addresses the client's need for both growth and security.