Accredited Wealth Management Advisor Practice Exam

What relationship exists between investment strategy and investment policy?

1. Investment strategy is independent of investment policy.

2. Investment strategy dictates the investment policy.

3. Investment policy dictates investment strategies to be employed.

4. Investment strategy is subservient to investment policy.

The correct answer is: Investment strategy is subservient to investment policy.

The relationship between investment strategy and investment policy can be best understood by recognizing that investment policy serves as a foundational framework that guides the development of investment strategies. Investment policy outlines the overarching goals, risk tolerance, and asset allocation guidelines tailored to meet the specific needs and objectives of an investor or organization. It sets the parameters within which investment strategies can be formulated and implemented. Investment strategies, on the other hand, are the specific methods or approaches employed to achieve the objectives defined in the investment policy. They may include tactical asset allocation, stock selection criteria, or market timing decisions. Since investment strategies must align with the goals and constraints set forth in the investment policy, they are considered to be subordinate to it. This means that any investment strategy must operate within the guidelines established by the investment policy, ensuring coherence and appropriateness in achieving the desired financial outcomes. This hierarchical relationship is crucial for effective wealth management, as it maintains focus and consistency in decision-making processes.