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What is Asset allocation?What is asset class?

What is Asset allocation?What is asset class?

by Nusrat Islam -
Number of replies: 1

Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash.

The asset allocation that works best for at any given point in our life will depend largely on our time horizon and our ability to tolerate risk.

An asset class is a group of economic resources sharing similar characteristics, such as riskiness and return. There are many types of assets that may or may not be included in an asset allocation strategy.Asset class rather than individual security decisions most important for investors.


In reply to Nusrat Islam

Re: What is Asset allocation?What is asset class?

by esmot ara -

Asset allocation refers to an investment strategy in which individuals divide their investment portfolios between different diverse asset classes to minimize investment risks. The asset classes fall into three broad categories: equities, fixed-income, and cash and equivalents. Anything outside these three categories is often referred to as alternative assets.

For example:

Let’s say Mr. X is in the process of creating a financial plan for his retirement. Therefore, he wants to invest his $10,000 saving for a time horizon of five years. So, his financial advisor may advise Joe to diversify his portfolio across the three major categories at a mix of 50/40/10 among stocks, bonds, and cash. 

The distribution of his investment across the three broad categories, therefore, may look like this: $5,000/$4,000/$1,000.

Financial advisors usually advise that to reduce the level of volatility of portfolios, investors must diversify their investment into various asset classes. Such basic reasoning is what makes asset allocation popular in portfolio management because different asset classes will always provide different returns. Thus, investors will receive a shield to guard against the deterioration of their investments.