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Asset Allocation TheoryAsset Allocation Theory: What is asset allocation? Asset allocation is essentially a form of risk diversification. The ideal is to find investment classes that are not correlated with one another in any way. While this is not necessarily possible, the next best alternative would be to find investments that have low correlation with one another. Asset Allocation TheoryThe theory of asset allocation relies on several basic concepts:
History of Asset AllocationAsset allocation began from the work by Harry Markowitz from the University of Chicago. In his paper, he argued that financial risk is a desirable component of portfolio management, as it leads to high rates of return. He also argued that portfolio risk can be controlled through the proper diversification of investments, and that the risk of individual investments are relatively unimportant compared to the way all the investments work together to reduce overall portfolio risk. Markowitz later developed his theory further to what is now known as the Modern Portfolio Theory. This theory explained the mechanics of efficient asset allocation, and soon became highly popularized. Now, the MPT methodology can be easily followed by making use of various free basic asset allocation softwares available on the Internet. Modern Portfolio Theory: The Free LunchIn the asset allocation theory, the free lunch refers to the fact that if one can diversify across many dissimilar investments and rebalance them annually to adjust for price fluctuations, the annual volatility of the portfolio will be reduced while returns will be increased – thus the ‘free lunch’. Free Billion Dollar Income NewsletterSign up for the free Billion Dollar Newsletter. Filled with ideas and strategies on generating wealth, personal effectiveness, how to apply the law of attraction, how to make money online and more, this newsletter is a powerful way to start your week. Your email address will be kept confidential. Easily unsubscribe at any time. Sign up right here: Feel free to link to this page to share the information here
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