Step 3: Asset Allocation Model
Asset Allocation is the method used to divide a portfolio into different classes of investments. This allocation should reflect your investor personality.
The triangle below arranges various investment choices according to the risk-reward relationship. The higher the investment is located in the triangle, the higher the potential reward and the higher the risk. Since cash and cash equivalents offer minimal risk and low return, they are located at the bottom of the triangle. It is important to realize, however, that the types of investments listed under each section of the triangle are only a framework.
Types of particular investments vary with economic conditions. The classification of a stock as low, moderate or high risk depends on the perspective of the investor. In a sense, risk is in the "eye of the beholder". Careful analysis is the best way to choose investments.
Asset Allocation Categories
The choice of asset allocation as illustrated below will effect the risk and your return.