Canadian Securities Course (CSC) Level 2 Practice Exam

What is a primary investment constraint that must be considered by clients according to the portfolio management process?

1. Liquidity requirements

2. Security selection

3. Market timing

4. Chance

The correct answer is: Liquidity requirements

Liquidity requirements are indeed a primary investment constraint that must be considered in the portfolio management process. This is because clients often have specific needs for accessing their capital at certain times, which can affect the types of investments chosen. For instance, if a client anticipates needing cash for an upcoming major expense, the portfolio manager must ensure that a portion of the portfolio is allocated to more liquid assets, such as stocks or bonds that can be easily converted to cash without significant loss. While security selection, market timing, and chance play relevant roles in managing a portfolio, they are more about the strategies and methodologies used to maximize returns rather than direct constraints imposed by clients' financial scenarios or needs. Focusing on liquidity ensures that clients can meet their financial obligations without incurring losses due to the sale of illiquid assets.