Asset Allocation

The strategy of dividing an investment portfolio among different asset classes -- stocks, bonds, real estate, commodities, cash -- to balance risk and reward according to an investor's goals, risk tolerance, and time horizon. Modern Portfolio Theory, developed by Harry Markowitz in 1952, demonstrated mathematically that diversification across asset classes can improve returns for a given level of risk. Studies suggest that asset allocation decisions explain more than 90% of a portfolio's return variability over time.