A portfolio manager is evaluating a client's current portfolio which has a Beta of 1.2 relative to the S&P/TSX Composite Index. The client expresses concern about potential market volatility but still seeks growth. To reduce the portfolio's systematic risk while maintaining exposure to growth, which of the following actions would be most appropriate?

Question: A portfolio manager is evaluating a client's current portfolio which has a Beta of 1.2 relative to the S&P/TSX Composite Index. The client expresses concern about potential market volatility but still seeks growth. To reduce the portfolio's systematic risk while maintaining exposure to growth, which of the following actions would be most appropriate?

Answer options:

• Increase the allocation to high-growth, small-cap Canadian equities.
• Add a significant allocation to Canadian government bonds. ✅ Shift investments from Canadian equities with high Betas to those with lower Betas.
• Allocate a portion of the portfolio to commodity futures contracts.

Correct answer: Shift investments from Canadian equities with high Betas to those with lower Betas.

Explanation: Beta measures systematic risk. To reduce a portfolio's Beta and thus its systematic risk, the manager should shift investments from higher Beta assets to lower Beta assets within the same asset class, or to assets with a low correlation to the market.