Maximizing the probability of achieving investment goals - An objective risk management approach to efficient portfolio asset allocation decisions.

This article describes a three-step process for using probabilities to decide objectively which specific efficient portfolio is best suited to achieve a long-term investment goal. The underlying premise is that an increased probability of achieving the investment goal is consistent with reduction of the overall investment risk. Three observations were found to have special significance. First, the overall probability can vary dramatically, depending on which efficient portfolio is selected. Second, using probability as; the risk management criterion, the classical risk-reward relationship is expanded to include regions of increased efficient portfolio average returns (and volatility) as being associated with reduced investment risk. Third, regions of maximum probability are readily identified, allowing an objective determination of the optimum (that is, lowest-risk) efficient portfolios.