A Canadian client with a moderate risk tolerance and an investment objective to fund their retirement in 15 years has an existing portfolio heavily weighted towards Canadian dividend-paying stocks. The portfolio manager recommends adding international equities, Canadian fixed income, and real estate investment trusts (REITs). What is the primary objective of this recommendation?

Question: A Canadian client with a moderate risk tolerance and an investment objective to fund their retirement in 15 years has an existing portfolio heavily weighted towards Canadian dividend-paying stocks. The portfolio manager recommends adding international equities, Canadian fixed income, and real estate investment trusts (REITs). What is the primary objective of this recommendation?

Answer options:

• To increase the overall expected return of the portfolio by exploiting market inefficiencies.
• To reduce portfolio income volatility and enhance capital appreciation potential through diversification. ✅ To lower the portfolio's correlation with Canadian economic cycles and reduce overall risk.
• To improve the tax efficiency of the portfolio by adding different asset classes.

Correct answer: To lower the portfolio's correlation with Canadian economic cycles and reduce overall risk.

Explanation: Adding asset classes like international equities, fixed income, and REITs diversifies the portfolio, reducing its reliance on a single market (Canada). This lowers the portfolio's correlation with specific Canadian economic cycles, thereby reducing overall portfolio risk.