A portfolio manager reviews a client's performance during a market downturn where global equities fell by 15% and Canadian bonds rose by 2%. The client's portfolio, with an initial 70% equity / 30% fixed income allocation, declined by 10%. The manager observes that the equity portion declined by 18% and the fixed income portion rose by 1%. What does this suggest about the portfolio's actual asset allocation at the start of the downturn?

Question: A portfolio manager reviews a client's performance during a market downturn where global equities fell by 15% and Canadian bonds rose by 2%. The client's portfolio, with an initial 70% equity / 30% fixed income allocation, declined by 10%. The manager observes that the equity portion declined by 18% and the fixed income portion rose by 1%. What does this suggest about the portfolio's actual asset allocation at the start of the downturn?

Answer options:

• The portfolio had an overweight to fixed income relative to its target allocation. ✅ The portfolio had an overweight to equities relative to its target allocation.
• The portfolio maintained its target asset allocation accurately.
• The portfolio's fixed income component was not diversified enough.

Correct answer: The portfolio had an overweight to equities relative to its target allocation.

Explanation: If the portfolio declined by 10% and the equity portion fell by 18% (more than the global equity market), while fixed income rose by only 1% (less than the Canadian bond market), it suggests the portfolio had a higher exposure to equities than the target, leading to a larger overall portfolio decline than expected based on the target allocation and market movements.