A Canadian foundation requires its endowment portfolio to generate sufficient income to cover its annual operating expenses while preserving capital in real terms over the long run. The portfolio manager proposes a highly diversified portfolio including Canadian and global equities, fixed income, real estate, and infrastructure. This approach primarily addresses which aspect of portfolio management?

Question: A Canadian foundation requires its endowment portfolio to generate sufficient income to cover its annual operating expenses while preserving capital in real terms over the long run. The portfolio manager proposes a highly diversified portfolio including Canadian and global equities, fixed income, real estate, and infrastructure. This approach primarily addresses which aspect of portfolio management?

Answer options: ✅ Concentration risk in a single asset class or geographic region.

• Liquidity risk inherent in certain alternative investments.
• Tax optimization strategies for non-profit organizations.
• Interest rate sensitivity of the fixed income component.

Correct answer: Concentration risk in a single asset class or geographic region.

Explanation: Diversifying across various asset classes and geographies reduces the overall portfolio risk by ensuring that poor performance in one area can be offset by better performance in another. This directly addresses concentration risk, which arises from excessive exposure to a single asset or market segment.