The coin-toss illustration

This one is not written up yet

The definition above is the short version. A full explanation — how it works, a worked example and the exam traps — is still being written. In the meantime the chapter below covers it in context.

Written up from the same chapter

• Asset allocationThe decision on how to distribute a client's wealth across asset classes — the first decision in building a portfolio, and the one that explains most of what the portfolio then does.
• DiversificationSpreading an exposure across holdings that do not move together, so that total risk falls by more than total return does — minimising risk per unit of return.
• Risk profilingEstablishing how much risk an investor should carry by weighing three separate things — the need to take risk, the financial ability to take it, and the psychological willingness to bear it.
• Strategic asset allocationThe long-term target split of a portfolio across asset categories, fixed from the investor's goals, time horizon and risk profile rather than from any view on markets.
• Tactical asset allocationDeliberately shifting a portfolio away from its strategic target to exploit conditions in particular markets, with the stated aim of improving risk-adjusted return rather than simply chasing return.