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Asset allocation definition
Asset allocation is the process of dividing the investments made among the different kinds of assets such as stocks, real estate, bonds and cash to optimize the risk or reward trade-off based on an individual’s or institution’s specific situation and goals. Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, investment horizon, and risk tolerance.
It is a key concept in financial planning and the money management. There are three main asset classes which are the equities, cash and equivalents and the fixed income, have different levels of risk and return so each will behave differently over time. Asset allocation is dividing the instrument funds among markets to achieve diversification or maximum return. There is no simple formula that can find the right asset allocation for every individual.
Asset Allocation Funds Homework Solutions
There are different types of assets which may or may not be included in an asset allocation strategy:
a) Cash and the cash equivalents like deposit accounts etc.
b) Fixed interest securities such as the bonds, government or corporate securities, short term, long term securities, intermediate securities, emerging markets or convertible security.
c) Collectibles such as asset, stamps or coins.
d) The commodities like precious metals, energy others
e) Foreign currency
f) Insurance products like the annuity, personal life insurance products etc.
g) Derivatives such as the market neutral strategies, long-short strategies, options, debts, and futures.
There are many types of asset allocation strategies which are based on the investment goals, tolerance, risk, time frames, and diversification.
a) Strategic Asset Allocation: Goal is to create an asset mix which will provide the optimal balance between the expected risk and return for a long-term horizon.
b) Tactical Asset Allocation: The process in which an investor takes a more active approach that tries to position a portfolio into those assets, stocks or sectors that show the most potential for gains.
c) Core-Satellite Asset Allocation: It is more or less hybrid of both the strategic and tactical allocations mentioned above.
d) Systematic Asset Allocation: It is made on three different assumptions which are-
• Markets provide an explicit information about the available returns
• Relative expected returns reflect the consensus.
• The expected returns provide clues to the actual returns
