Question

An investor has a long-time horizon and desires to earn the market rate of return. However, the investor will need to withdraw funds each year from her investment portfolio. The biggest constraint a planner would face with this client is a ________ constraint.

Answer 1

Liquidity

Step-by-step explanation:

An investor has a long-time horizon and desires to earn the market rate of return. However, the investor will need to withdraw funds each year from her investment portfolio. The biggest constraint a planner would face with this client is a liquidity constraint.

Liquidity constraint is the lack of cash an individual can get If she is withdrawing from her investment portfolio there is a tendency to have not enough funds

Answer 2

Answer: C. Liquidity.

Step-by-step explanation:

The Investor has a long term time frame and desires to earn the market rate. For this to happen, financial vehicles catering for her needs would need to be locked up for a longer period of time for example 5 years before they allow withdrawals.

She however, wants to be able to withdraw yearly. This would mean that some of her positions would either need to be liquidated yearly or would have to pay a significant yearly payout.

As earlier mentioned, longer term instruments are usually locked up for long periods to be able to get the market rate. If the investor needs a yearly withdrawal from her positions, getting it from locked up positions will be a Liquidity challenge. The positions won't be easily sold and could attract a hefty fee to be liquidated and because they are locked up, they will not pay out yearly either.