A client is considering selling a significant portion of their holding in an S &...

Selling a substantial portion of a broad-market ETF to purchase one company’s shares materially increases issuer concentration and company-specific risk. The S & P/TSX 60 Index ETF provides exposure to numerous large Canadian companies across multiple industries. Replacing that diversified exposure with a single stock makes the portfolio significantly more dependent on one issuer’s earnings, management, competitive position and financial condition.

Even a historically successful company can experience operational failures, regulatory action, technological disruption, litigation, changing customer demand or an unexpected decline in profitability. These events can produce volatility and permanent capital loss that would have a more limited effect within a diversified index portfolio. Option B therefore identifies the principal risk.

Mean reversion is a possible market behaviour, but it is not the most direct or certain consequence of the transaction. Option C is not necessarily true because the individual stock could outperform or underperform the market. Option D is incorrect because the ability to recognize a capital loss for tax purposes does not generally disappear merely because the investor holds an individual security.

CIRO guidance emphasizes that excessive exposure to one issuer can adversely affect both risk and liquidity and should be evaluated within the client’s overall portfolio. Official references: CIRO Retail Securities Syllabus—diversification, concentration risk and portfolio construction; CIRO Suitability Guidance—issuer concentration and liquidity.

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