Short definition: Asset allocation is the process of dividing an investment portfolio among different asset classes, such as stocks, bonds, and cash.
Explanation: It is a strategic decision that aims to balance risk and return by diversifying investments across various asset categories. The specific allocation depends on an investor’s risk tolerance, investment goals, and time horizon.
Example: A conservative investor might have a higher allocation to bonds and cash, while an aggressive investor might have a higher allocation to stocks.
Additional information (optional): Asset allocation is a fundamental principle of investment management. It is crucial for managing risk and optimizing returns over the long term. Rebalancing a portfolio periodically is essential to maintain the desired asset allocation as market conditions change.