A Canadian client's investment portfolio strategic target is 65% Canadian Equities, 25% U.S. Equities, and 10% Canadian Bonds. Due to a recent surge in the Canadian equity market, the portfolio's current allocation is 72% Canadian Equities, 20% U.S. Equities, and 8% Canadian Bonds. The client maintains a growth-oriented risk profile. Which of the following best describes the immediate implication of this drift?

Question: A Canadian client's investment portfolio strategic target is 65% Canadian Equities, 25% U.S. Equities, and 10% Canadian Bonds. Due to a recent surge in the Canadian equity market, the portfolio's current allocation is 72% Canadian Equities, 20% U.S. Equities, and 8% Canadian Bonds. The client maintains a growth-oriented risk profile. Which of the following best describes the immediate implication of this drift?

Answer options:

• The portfolio is now more diversified than originally intended.
• The portfolio's overall risk profile has decreased, making it more conservative. ✅ The portfolio is now exposed to a higher concentration risk in Canadian equities and potentially higher overall volatility.
• The portfolio's expected return has significantly increased due to higher equity exposure.

Correct answer: The portfolio is now exposed to a higher concentration risk in Canadian equities and potentially higher overall volatility.

Explanation: A significant overweighting in Canadian equities (72% vs 65% target) with underweights in other asset classes increases concentration risk in the Canadian market. This also likely increases the portfolio's overall volatility beyond the client's intended risk appetite, as equity markets are generally more volatile than bonds.