Asset allocation involves apportioning a portfolio among various categories of investment. At its most basic level, assets can be allocated among stocks, bonds, and cash. A more detailed allocation would allocate by security size into large, mid, and small cap, into geographical region such as domestic, international, and emerging markets, or into economic sector such as energy, consumer staples, and technology.
The asset allocation of a portfolio has more impact upon the risk and reward characteristics of a portfolio than any other factor. Special care should be taken to understand both the market risk and purchasing power risk of various equity exposure levels. The reliability of positive outcomes is increased to the extent that portfolios are diversified by security size, price, region, sector, and as the number of holdings in each of these asset classes increases. Advantage is gained by massive diversification.