90/10 Strategy

AAA

DEFINITION of '90/10 Strategy'

An investing strategy that involves deploying 90% of one's investment capital in interest-bearing instruments that have a lower degree of risk, and the balance 10% in high-risk investments. This is a relatively conservative investment strategy that aims to generate higher yields on the overall portfolio. Potential losses will typically be limited to the 10% that is invested in the high-risk investments, depending on the quality of bonds purchased.

INVESTOPEDIA EXPLAINS '90/10 Strategy'

A common application of the 90/10 strategy involves the use of short-term Treasury Bills for the fixed-income component (90% of the portfolio), with the balance 10% used for higher risk securities such as equity or index options or warrants.


For example, assume an investor with a $100,000 portfolio uses the 90/10 strategy. He or she invests $90,000 in one-year Treasury Bills that yield 4% per annum, with the balance $10,000 deployed in equity in the S&P 500. If the S&P 500 returns 10% at the end of one year, the overall return on the portfolio would be 4.6% (0.90 x 4% + 0.10 x 10%). However, if the S&P 500 declines by 10%, the overall return on the portfolio after one year would be 2.6% (0.90 x 4% + 0.10 x -10%).

RELATED TERMS
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  2. Warrant

    A derivative security that gives the holder the right to purchase ...
  3. Index Option

    A financial derivative that gives the holder the right, but not ...
  4. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with ...
  5. Risk

    The chance that an investment's actual return will be different ...
  6. Losses and Loss-Adjustment Expense

    The portion of an insurance company’s reserves set aside for ...
Related Articles
  1. Achieving Optimal Asset Allocation
    Investing Basics

    Achieving Optimal Asset Allocation

  2. 4 Steps To Building A Profitable Portfolio
    Mutual Funds & ETFs

    4 Steps To Building A Profitable Portfolio

  3. How To Be A Conservative Investor
    Investing Basics

    How To Be A Conservative Investor

  4. An Alternative Covered Call Options ...
    Options & Futures

    An Alternative Covered Call Options ...

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center