Asset Allocation
How a portfolio is split across stocks, bonds, cash, and alternatives.
What is Asset Allocation?
The top-level decision about which asset classes to hold and in what proportion. Research consistently finds it explains the large majority of the variability in portfolio returns over time - far more than security selection.
Asset Allocation: a worked example
A 60/40 portfolio is 60% equities, 40% fixed income.
More terms in Portfolio Management
Rebalancing
Periodically restoring the portfolio to its target weights.
Dollar-Cost Averaging
Investing a fixed amount on a fixed schedule regardless of price.
Modern Portfolio Theory (MPT)
Optimize the portfolio as a whole, not security by security.
Efficient Frontier
The set of portfolios with the best return for each level of risk.
Capital Asset Pricing Model (CAPM)
Expected return = risk-free rate + beta x market risk premium.
Efficient Market Hypothesis
Prices already reflect available information.
Compound Annual Growth Rate (CAGR)
The smoothed annual rate that gets you from start to end value.
Total Return
Price change plus income, as a single return figure.