Answer:
As a financial analyst working in MLC Funds, I would recommend a strategy known as portfolio diversification to combine a risky equity portfolio with a risk-free asset such as Treasury bonds.
The idea behind portfolio diversification is to balance the risk and return of a portfolio by investing in a mix of different types of assets. By diversifying the portfolio, we can reduce the overall risk while still maintaining a level of return that meets the client's investment objectives.
To create an optimal portfolio for our client, we would start by analyzing their risk tolerance, investment goals, and time horizon. We would then recommend a mix of risky equity investments and risk-free assets such as Treasury bonds.
The risky equity investments would provide the potential for higher returns but come with a higher level of risk. By combining these investments with risk-free assets such as Treasury bonds, we can reduce the overall risk of the portfolio while still maintaining a level of return that meets the client's investment objectives.
The proportion of risky equity investments and risk-free assets in the portfolio would depend on the client's risk tolerance and investment goals. For example, a more risk-averse client may have a higher proportion of risk-free assets in their portfolio, while a more aggressive client may have a higher proportion of risky equity investments.
Overall, combining a risky equity portfolio with a risk-free asset such as Treasury bonds through portfolio diversification can help us create an optimal portfolio that meets our client's investment objectives while managing risk.