A Canadian pension fund manager is tasked with constructing a new portfolio for a defined benefit plan. The plan has a long-term liability profile, a high capacity for risk, and aims to achieve a return of inflation + 4% annually. Which of the following portfolio construction approaches would be most suitable to meet these objectives?

Question: A Canadian pension fund manager is tasked with constructing a new portfolio for a defined benefit plan. The plan has a long-term liability profile, a high capacity for risk, and aims to achieve a return of inflation + 4% annually. Which of the following portfolio construction approaches would be most suitable to meet these objectives?

Answer options:

• A highly concentrated portfolio of large-cap Canadian dividend stocks to capitalize on tax advantages. ✅ A diversified global multi-asset portfolio with a significant allocation to growth-oriented equities and alternative investments.
• A portfolio solely invested in Canadian government and corporate bonds to minimize volatility.
• An actively managed portfolio focused on market timing and sector rotation to outperform benchmarks.

Correct answer: A diversified global multi-asset portfolio with a significant allocation to growth-oriented equities and alternative investments.

Explanation: A long-term objective requiring inflation + 4% suggests a need for growth assets and diversification to manage risk. A diversified global multi-asset portfolio, including growth equities and alternatives, is best suited to achieve long-term real returns while managing risk across different market cycles.