Asset allocation is a systematic plan regarding investments to establish an equilibrium between risk and reward by distributing listed assets on the basis of individual's risk tolerance, objectives etc. Three
basic asset classes are
fixed income, CCE (Cash and Cash Equivalents) and
equities. All the three asset classes hold different risk levels and returns and behave accordingly. CCE is an item regarding assets of a company that can be converted into cash instantly. Examples of CCE are securities, treasury bills, bank accounts. Equity or stocks can be defined as one of the principal asset classes. In summary it can be said that asset allocation is an arrangement which is used to construct expected risk and return for the investors.
Process of allocation
One of the prime tasks of investors is asset allocation. There is barely any strict rules to allocate one's asset, nor there is any standard procedure to structure the asset. Investors need to allocate their
investment in stocks, bonds and CCE, as these are the determining factors for asset allocation. Assets are allocated on the basis of investor's objectives, age and associated risks with the precise distributing of asset classes like
CCE, equity and
fixed income. Asset allocation is a predefined process, where assets are proportionately divided among various sort of securities.
Asset class
Some specific asset categories include bonds, stocks, cash, securities and real estate. Those assets which are within the same class, normally demonstrate similar features and they are under the same rules and regulations.
Some other asset classes include bonds, cash, stocks, foreign currency, treasured metals, natural resources, luxury items, automobiles etc.
Some efficient techniques of
asset allocation:
One of the strategies is mixing 80 per cent equity with 20 per cent debt, if investors want to acquire high return. The other method can be a mix up of 60 per cent equity with 40 per cent debt, if investors want to acquire moderate return and mixing of 20 per cent equity with 80 per cent debt, if the investors want to acquire low return and risks portfolio.
Goal of asset allocation
The objective of
asset allocation is to create the most effective mix of asset classes with some considerations like investment volatility, risk tolerance, etc.