David,

Thanks for checking out our blog. Determining an investor's appropriate asset allocation most often begins with an examination of their risk and return objectives. The optimal asset allocation will also be largely dependent on the capital market assumptions made regarding asset class returns, risks and correlations. In theory, it is a matter of finding a spot on the efficient frontier that maximizes return for a given level of risk. This risk-return tradeoff is at the core of Modern Portfolio Theory (see Markowitz’ seminal article from 1952 “Portfolio Selection”). Besides the investor’s tolerance for risk and their return expectations, other important considerations are liquidity needs, taxes and time horizon.

Dave