Asset allocation describes how investment assets are dividend into the 3 basic investment types -- stocks, bonds and cash -- within an investment portfolio.
For a simple example, a mutual fund investor might have 3 different mutual funds in her investment portfolio: Half of her money is invested in a stock mutual fund and the other half is divided equally among two other funds -- a bond fund and a money market fund.
The investor's asset allocation is as follows:
- 50% Stocks
- 25% Bonds
- 25% Cash
In this regard, asset allocation describes the investors mix of investment assets. However, asset allocation can also describe the decision process of allocating investment assets.
See also: Asset Classes