Asset Allocation

PrepNuggets

The process of determining how investment funds should be distributed among asset classes.

This process begins with an analysis of the risk and return characteristics of various asset classes.  Common asset classes identified are cash, fixed-income securities, publicly traded stocks, private equity, real estate, as well as commodities.

You can take the top-down analysis approach, which is to examine the current economic conditions and forecasts of such macroeconomic variables such as GDP growth, inflation, and interest rates, in order to identify the asset classes that are most attractive. Based on the risk and returns expectations of the various asset classes, the target asset allocation can be determined.  

See also: Security Selection

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