How a portfolio is divided among asset classes such as stocks, bonds, cash, and alternatives to balance return objectives and risk.
How it works
An allocation policy sets target weights for major asset classes and a rule for returning to those weights. The mix should reflect the investor’s time horizon, liquidity needs, capacity for loss, and tolerance for volatility.
Example
A portfolio with 60% shares, 30% bonds, and 10% cash may rebalance when a holding moves materially away from its target rather than reacting to headlines.
Limitations
Allocation reduces concentration risk but cannot prevent losses. Correlations, liquidity, taxes, and transaction costs can change the result.
This definition explains Asset Allocation accurately, with its practical use and material limitations.
Key assumptions
- The named calculation or convention is stated where definitions vary.
- The example is illustrative and not a forecast or recommendation.
What could invalidate the view
- A different market, instrument, jurisdiction, or methodology may use the term differently.
- The cited authority may revise its guidance or terminology.
- Editorial ownership
- Market Master · reviewed
- Approval state
- Reviewed financial content
- Evidence currency
- Current evidence window
- Source coverage
- 1 documented source