What does asset allocation define in a pension fund?

• A. Administrative costs
• B. Risk and return profile of the fund
• C. Tax rate
• D. Legal structure

Answer: (B)

Asset allocation determines how a pension fund is spread across different asset classes, which directly shapes its expected return and the level of risk it bears. Placing more funds in growth assets like equities can raise potential long-term returns but increases volatility, while a higher bond or cash allocation tends to lower risk and smooth returns, reducing potential upside. The mix across asset classes sets the fund’s overall risk–return profile and its ability to meet future liabilities.

It doesn’t fix administrative costs, tax rates, or the fund’s legal structure; those are determined by operations, jurisdiction, and governance, not by how investments are allocated.