What is the primary goal of asset allocation?

The primary goal of asset allocation is to balance risk and return in an investment portfolio. This strategy involves distributing an investor's capital among different asset classes, such as stocks, bonds, real estate, and cash, each with its own risk-return profile. By doing so, an investor can achieve a portfolio that aligns with their risk tolerance and investment objectives.

Effective asset allocation helps to mitigate risks in a portfolio while aiming for optimum returns based on market conditions. The principle behind this approach is that different asset classes tend to react differently to market changes; for instance, when stocks are performing poorly, bonds may provide stability. This diversification can lead to enhanced returns over the long term while reducing the potential for significant losses.

While maximizing a firm's revenue, minimizing investment costs, and reducing tax liabilities are important considerations in financial management, they do not specifically address the core purpose of asset allocation, which is primarily focused on managing the relationship between risk and expected returns within a portfolio.