Asset Allocation
Asset allocation is the strategic distribution of investments across asset classes (stocks, bonds, real estate, alternatives) to balance risk and return according to investor goals.
Concept map
Learn, apply, review
Definition
Asset allocation is the strategic distribution of investments across asset classes (stocks, bonds, real estate, alternatives) to balance risk and return according to investor goals.
Use case
Used in portfolio management workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Asset Allocation
Studies show asset allocation explains 90%+ of portfolio return variability over time, far outweighing security selection or market timing. Strategic allocation sets long-term targets; tactical allocation allows short-term deviations based on market views. Rebalancing maintains target weights as markets move.
Example: A 60/40 portfolio (60% stocks, 40% bonds) is classic for moderate risk tolerance. If stocks rally to 70% of the portfolio, rebalancing sells stocks and buys bonds to restore 60/40, enforcing 'buy low, sell high' discipline mechanically.