Ms. Chen, a mutual fund representative, is reviewing a new client's existing portfolio and notices that it consists entirely of Canadian bank stocks. The client is 45 years old, has a moderate risk tolerance, and is saving for retirement. What key principle of portfolio construction is most clearly being violated?

Question: Ms. Chen, a mutual fund representative, is reviewing a new client's existing portfolio and notices that it consists entirely of Canadian bank stocks. The client is 45 years old, has a moderate risk tolerance, and is saving for retirement. What key principle of portfolio construction is most clearly being violated?

Answer options:

• Tax-loss harvesting efficiency.
• Liquidity management. ✅ Diversification across asset classes and geographies.
• Expense ratio minimization.

Correct answer: Diversification across asset classes and geographies.

Explanation: A portfolio solely of Canadian bank stocks lacks diversification across asset classes (e.g., bonds, real estate) and geographies. This concentration exposes the client to significant idiosyncratic risk related to the Canadian financial sector.