Asset allocation - Financial definition
Concise definition of the term asset allocation
Asset allocation refers to the strategic distribution of investments across various asset classes, such as stocks, bonds, and cash equivalents, to optimize portfolio returns while managing risk.
Comprehensive definition of the term asset allocation
Asset allocation is a fundamental strategy in finance that involves dividing an investment portfolio among different asset classes based on factors like risk tolerance, investment goals, and time horizon. This approach aims to achieve diversification, mitigate risk, and optimize returns by spreading investments across a mix of asset types that have historically exhibited different levels of correlation and performance.
For example, a conservative investor may allocate a larger portion of their portfolio to bonds and cash equivalents for stability, while a more aggressive investor may allocate a higher percentage to stocks for growth potential. Asset allocation is a dynamic process that may require periodic adjustments based on changes in market conditions, economic outlook, and individual circumstances, ensuring alignment with the investor's objectives and risk preferences over time.