13. Strategy 4 - Asset allocation Asset allocation is the proportion of your overall investment portfolio that you have invested in various categories of assets. Typical asset categories include, for example, equities (stocks or stock mutual funds), bonds (or bond funds), and cash (or cash equivalents such as Treasury bills). The following table illustrates several model portfolios that you can use as a basis for your own investment plan, depending on various factors, such as your time horizon, your risk tolerance, and your investment philosophy: Risk Tolerance/Investment Philosophy Asset Allocation and Time Horizons 0-5 Years 6-10 Years 11+ Years 10% Cash 20% Bonds 100% Equities 30% Bonds 80% Equities High Risk/ Aggressive 60% Equities 20% Cash 10% Cash 20% Bonds Moderate Risk/Moderate 40% Bonds 30% Bonds 80% Equities 40% Equities 60% Equities 35% Cash 20% Cash 10% Cash Low Risk/Conservative 40% Bonds 40% Bonds 30% Bonds 25% Equities 40% Equities 60% Equities Suppose that Maylin is using an investment program to save money for a down payment on a condominium. Therefore, she will need to use her investment money within the next three years. Although Maylin doesn't mind taking on a small amount of risk, her primary investment goal is the preservation of her investment capital. Maylin is investor with a time horizon of Using the asset allocation provided, what is the ideal asset allocation for Maylin's portfolio, based on her time horizon and investment philosophy? If your answer is zero enter "O". Recommended asset allocation for Maylin's portfolio: Cash: % Bonds: % Equities: % In general, if you have a longer time horizon and a higher risk tolerance, then higher percentage of your portfolio should be in But if you are investing for a shorter time horizon, or if you have a more conservative investment philosophy, then you should invest a greater percentage of your portfolio in