This review is necessary to ensure that the optimal combinations of investments are balanced with the Funds' long term objective of meeting future liabilities. Asset allocation is the key to portfolio management. Asset allocation helps stabilize returns because all asset classes will have good or bad years. Diversification makes a portfolio less risky than the individual assets that make it up. Assets having good years can mitigate the losses of assets having bad years.
Risk is defined as the variability of returns over time.
The asset allocation study identifies the most efficient mix of assets for each level of risk. This means that for each level of risk, no other mix of assets has a higher return or, for each level of return, no other mix has a lower risk. The asset mixes on the efficient frontier represent the best diversified combinations of the asset classes considered in a particular study.