Elara, a 68-year-old retiree in Nova Scotia, has a $2,500,000 portfolio designed to generate income and preserve capital. Her portfolio's current asset allocation is 40% Canadian Equities, 20% International Equities, 30% Canadian Fixed Income, and 10% Real Estate Investment Trusts (REITs). Her financial advisor has proposed adding a 10% allocation to a global infrastructure fund that is uncorrelated with traditional equities and fixed income. If the goal is to enhance diversification and potentially improve the portfolio's risk-adjusted returns, what is the most appropriate adjustment Elara's advisor should consider to fund the new global infrastructure allocation, maintaining her overall risk profile?

Question: Elara, a 68-year-old retiree in Nova Scotia, has a $2,500,000 portfolio designed to generate income and preserve capital. Her portfolio's current asset allocation is 40% Canadian Equities, 20% International Equities, 30% Canadian Fixed Income, and 10% Real Estate Investment Trusts (REITs). Her financial advisor has proposed adding a 10% allocation to a global infrastructure fund that is uncorrelated with traditional equities and fixed income. If the goal is to enhance diversification and potentially improve the portfolio's risk-adjusted returns, what is the most appropriate adjustment Elara's advisor should consider to fund the new global infrastructure allocation, maintaining her overall risk profile?

Answer options:

• Reduce Canadian Equities to 30% and maintain existing allocations for other asset classes.
• Reduce Canadian Fixed Income to 20% and convert 5% of International Equities to Canadian Equities.
• Fund it entirely from the Canadian Fixed Income allocation, reducing it to 20%. ✅ Reduce Canadian Equities to 35% and International Equities to 15%.

Correct answer: Reduce Canadian Equities to 35% and International Equities to 15%.

Explanation: To maintain a similar overall risk profile while adding a new asset class, it is generally prudent to proportionally reduce allocations from existing riskier assets (equities) rather than solely from conservative assets (fixed income) when the new asset also has equity characteristics (like infrastructure). Reducing both Canadian and International Equities by 5% each (from 40% to 35% and 20% to 15% respectively) provides the 10% for the new allocation while maintaining a balanced reduction across equity sleeves.