Asset allocation — course checkpoint

You arrived able to name asset classes. You leave able to reason about a mix — which is a different and considerably more useful skill. Here is the whole course in one frame before the checkpoint quiz.

The four classes and their jobs

Equities are the growth engine, paid for in variability and deep drawdowns; the recovery arithmetic (−50% needs +100%) is why the equity weight is the main risk dial. Bonds do three separable jobs — income, ballast, and liquidity — and carry two nameable risks: duration is the ballast risk, credit is equity risk wearing a bond's clothes. Cash converts variability risk into erosion risk; it is not risk-free, it is differently-risky. Real assets offer a loose, purchased, regime-dependent inflation link — a hedge that helps in rare years and is paid for in the ordinary ones.

The three numbers worth carrying out of this course

1. Money weight ≠ risk weight. In an illustrative 60/40 with 15% and 5% volatilities, the equity sleeve holds 60% of the capital and supplies about 95% of the variance.
2. Drift is automatic, and it runs toward whatever has performed best. An illustrative 60/40 running 8% and 2% for a decade becomes roughly 73/27 with nobody making a decision. Left alone, a portfolio concentrates into whatever has recently won — usually, though not always, the riskier sleeve.
3. Currency is a second bet. A +10% foreign return with an 8% adverse currency move lands as +1.9%; with an 8% favourable move, +18.8%. Seventeen points, from the exchange rate alone.

What the allocation research does and does not say

Policy allocation explains roughly 90% of a single portfolio's return variability over time, roughly 40% of the difference between one portfolio and another, and — before costs, across all investors — essentially 100% of the average level of return. The popular compression of all three into "allocation is 90% of your returns" is not what the studies found. The defensible statement is that the mix is the dominant driver of how a portfolio moves.

The framework, not the answer

Every question in this course routes back to four inputs, and none of them is universal:

• Horizon — a date and an amount, not a mood. It determines whether a recovery has room to happen before a sale is forced.
• Capacity — the objective ability to absorb loss, measured from facts: income stability, obligations, liquidity, correlation between the portfolio and the paycheque.
• Tolerance — the subjective willingness to endure loss, revealed by behaviour rather than by questionnaire. The binding constraint is the lower of capacity and tolerance.
• Frictions — taxes, fees, currency, and the gap between the stated mix and the look-through mix. Fees are the only input knowable in advance.

What this course deliberately did not do

It did not tell you what to hold. Not once, and not by implication. 60/40, risk parity, all-equity and the endowment model appeared as reference points that structure a debate — never as recommendations, and the arguments against each were given the same space as the arguments for. There is no allocation that is correct independent of a specific investor's date, obligations, jurisdiction, tax position and temperament, and any source that hands you a percentage without asking about those has skipped the entire problem.

What you have instead is the set of questions a mix has to answer: What is each sleeve for? What relationship is the diversification relying on? What happens when that relationship breaks? How far has it drifted? What does correcting it cost? What am I holding that I did not choose?

Those questions travel. They work on a portfolio built in 2026 and on one built in 2050, on a mix with a famous name and on one with no name at all.

Before you sit it

Each of these is a minute at your desk. Any one that is not names the lesson to reopen first.

• Name the two jobs bonds do in a portfolio and the one job cash does — What do bonds and cash do for a portfolio?
• Say which of risk capacity and risk tolerance you could read off a bank statement — Why are risk capacity and risk tolerance different things?
• Give one advantage a threshold rebalancing rule has over a calendar one, and one cost — Calendar or threshold — when do professionals rebalance?
• Say what an unhedged foreign holding adds to your risk beyond the asset itself — What does currency do to a foreign holding?

Try it now

1. Take an illustrative portfolio of your own construction and write its policy in five lines: classes and their jobs, targets, ranges, rebalancing rule, review cadence.
2. Apply ten years of real returns to it from the two sleeves below, read on adjusted closes, then compute the drift, the restoring trade, and an estimate of that trade's tax and trading cost.

3. Write one paragraph naming what you still cannot know — future correlations, future returns, your own behaviour in a crash. That paragraph is the honest boundary of the discipline.

Checkpoint quiz next, then onward to performance measurement — where you find out what a portfolio actually delivered, and whether the number means what it appears to mean. Nothing in this course was a recommendation to buy, sell, or hold anything; you have learned how allocation decisions are reasoned about, which is a framework, not a prescription.