Asset allocation is simply a decision to expose certain percentages of total Fund assets to segments of the investment markets. In order to achieve higher returns, generally one must be willing to accept higher volatility. Volatility is one way to measure risk. Rates of Return To increase one's understanding, one can also look at the actual rates of return and volatility for the past 25 years. This places the spectrum of anticipated investment returns and risk in focus.
Most fiduciaries prefer to be some place in between.
That point that offers the greatest return with the least amount of risk is called the optimum asset allocation. Many Trustees through common sense have determined how their own portfolios should be structured based on the philosophy that one does not put all his or her eggs in one basket. By now as a Public Fund Trustee you may have a thought in mind as to how much risk you are willing to incur. This is often expressed in terms of an actuarial interest assumption, an assumed rate of earnings that the retirement fund will realize over a long period of time. Because defined benefit plans provide a benefit as a percentage of wages, the variable of inflation and its impact on wages can be substantial.