Asset allocation

60/40 portfolio

A classic mix of 60% equities and 40% bonds, used as shorthand for a moderate-risk balanced allocation and as a benchmark for multi-asset funds.

All-weather portfolio

The concept of building a mix that holds up across four broad macro environments: rising growth, falling growth, rising inflation and falling inflation.

Asset allocation

The split of a portfolio across asset classes such as equities, bonds, cash, commodities and property. For most long-horizon investors it drives more of the outcome than security selection.

Capital asset pricing model

A model stating that an asset's expected return equals the risk-free rate plus its beta times the equity risk premium, so only non-diversifiable risk is rewarded.

Core-satellite

A structure with a large, cheap, broadly diversified core plus small active or thematic satellites intended to add return without dominating the portfolio.

Diworsification

Adding holdings that do not improve the risk-return profile: overlapping funds, near-identical exposures, or positions too small to matter.

Drift

The gradual movement of actual portfolio weights away from their targets, caused purely by different assets producing different returns.

Dynamic asset allocation

Rule-based adjustment of portfolio weights in response to changing conditions such as realised volatility, drawdown or a trend signal.

Efficient frontier

The set of portfolios offering the highest expected return for each level of risk; anything below the curve is dominated by a better mix.

Equal risk contribution

The formal objective behind risk parity: choose weights so that every holding's marginal contribution to portfolio volatility is identical.

Glide path

A pre-set schedule that shifts a portfolio from growth assets toward defensive assets as a target date approaches.

Liability-driven investing

Building a portfolio to match a known future stream of payments rather than to maximise return, with interest-rate sensitivity matched to the liabilities.

Mean-variance optimisation

Solving for the weights that maximise expected return for a given variance, given inputs for expected returns, volatilities and correlations.

Modern portfolio theory

The framework, formalised by Markowitz, that treats a portfolio's risk as a function of holdings' volatilities and their correlations rather than as the sum of individual risks.

Naive diversification

Splitting capital equally across every available option without modelling correlations, expected returns or volatility. Often called the 1/N rule.

Rebalancing

Selling what has grown beyond its target weight and buying what has fallen below it, returning the portfolio to its intended allocation.

Rebalancing bands

Trigger levels around each target weight; you only trade when a holding drifts outside its band, which cuts turnover versus rebalancing on a fixed date.

Risk parity

An allocation method that sizes assets so each contributes a similar amount of risk to the portfolio, rather than a similar amount of capital.

Strategic asset allocation

The long-term target weights a portfolio is built around, chosen from horizon and risk tolerance rather than from a view on the next quarter.

Tactical asset allocation

Deliberate short-to-medium term deviations from the strategic weights, based on a view about valuation, momentum or the macro cycle.

Target date fund

A single fund that holds a diversified mix and automatically de-risks along a glide path toward a stated retirement year.

Back to the full dictionary.