The importance of asset allocation is to select a diversified mix of suitable asset classes that minimizes risk for a given level of expected return.
- The appropriate asset allocation policy is determined by an investor’s risk tolerance and return expectation requirements.
- Each investor’s risk tolerance and return requirements should be viewed in the context of the liabilities that the assets are supporting.
- The purpose of the exercise is to build a portfolio that can help to meet the financial goals of the investor.