Asset allocation is the most important decision that any investor needs to face, and there is no one-size-fits-all solution that can work for each and every investor. By asset allocation, we mean spreading the investor's total investment amount over certain assets (be it stocks, options, bonds, or any other financial instruments). When considering the allocation, the investor wants to balance the risk and the potential reward. At the same time, the allocation is dependent on factors such as the individual goals (expected return), risk tolerance (how much risk is the investor willing to accept), or the investment horizon (short or long-term investment).
The key framework in asset allocation is the modern portfolio theory (MPT, also known as mean-variance analysis). It was introduced by the Nobel recipient Harry Markowitz and describes how risk-averse...
