The assumption is that investors are risk adverse; that is, they are willing to accept risk if they are compensated in accordance with the level of risk they assume. Risk is defined as volatility, which is unmeasured and unpredictable. For examples, the aggressive portfolio model represents a high risk/high return ratio on one end of the continuum and the defensive portfolio represents low risk/low return ratio on the other end.

Since volatility is unpredictable, never constant, changing from hour to hour, day to day and year to year; therefore, the alternative is to manage risk by effectively diversifying assets across a wide variety of asset classes. The management pro9cess consist of four sets of portfolios-defensive, conservative, moderate and aggressive, each containing effective diversification across a wide variety of asset classes within the respective portfolios to maximize returns and minimize risks. The ratio combinations of 90/10% cash or cash equivalent = defensive, 50/50% of securities v cash =conservative, 70/30% securities v cash = moderate and 90/10% securities v cash or cash equivalent = aggressive are examples of managing the volatile universe.

Hence, portfolio diversification across many asset classes is the journey of the Efficient Frontier.

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