Asset Allocation means allotting assets according to its categories in a way that it balances risk and reward. Asset Allocation takes risk tolerance, investment horizon, and investor’s goals into account while deciding on the categorization and distribution of assets. This strategy is mainly required because of different behavior of assets over time due to their varying nature. For example, cash assets will behave differently over time compared to equities or fixed-income.
There is no simple way to decide the best strategy for asset allocation as it depends on number of factors. Since this is among the most important decision for an investor, specialized investment managers are hired to decide about the best way to distribute assets for maximized yield.