Measurement of the risk and return characteristics of individual investments are inadequate in explaining what happens when investments are combined in portfolios. The true measurement of diversification between assets is called the covariance of the assets. Covariance measures the timing, direction, and momentum of the movement of two variables. Here the question is, “Are they moving in the same direction at the same time, and what is the volatility of the movement of each variable?” By calculating the covariance’s and expected returns for all assets in any given portfolio, it is possible to calculate the optimal portfolio mix for any degree of risk. Each portfolio on this “efficient frontier” will generate the highest possible rate of return for any specific level of risk, with risk being measured by the standard deviation (variance) of returns. Any other portfolio, which exhibits the same standard deviation, will generate lower returns, and will therefore be considered inefficient.

   The number of assets in a portfolio is less important than the relationship of those assets. Therefore, having many assets in a portfolio doesn’t necessarily reduce the systematic risk in a portfolio as much as having negatively correlated assets.Further, it is a misconception, albeit a widely held one, that investors must accept higher levels of risk to achieve higher returns. By using asset allocation methodologies, investors may achieve higher returns with less risk.
Portfolio Structure is based on effective diversification of asset classes.

Example:

   Large Cap Equity Exposure - Both Value and Growth

   International Equity to Provide Global Diversification

   Small Cap Equity Positions - Both Value and Growth

   Domestic Fixed Income - US Government, Corporate, and Tax-Exempt Issues

   Sector Specific Positions