A Canadian balanced fund, initially holding 60% equities and 40% fixed income, begins to opportunistically increase its equity allocation to 75% without updating its prospectus or communicating formally with investors. This action most directly poses a risk to investors primarily due to:

Question: A Canadian balanced fund, initially holding 60% equities and 40% fixed income, begins to opportunistically increase its equity allocation to 75% without updating its prospectus or communicating formally with investors. This action most directly poses a risk to investors primarily due to:

Answer options:

• Increased management fees
• Unforeseen tax implications ✅ Misalignment with investment objectives and risk tolerance
• Potential for capital gains distributions

Correct answer: Misalignment with investment objectives and risk tolerance

Explanation: Uncommunicated changes in asset allocation (style drift) can lead to a portfolio that no longer aligns with an investor's stated risk tolerance or investment objectives, potentially exposing them to unexpected levels of risk or deviating from their financial plan.