What is 'Allocational Efficiency'

Allocational efficiency is a characteristic of an efficient market in which capital is allocated in a way that is most beneficial to the parties involved. An efficient market is one in which all pertinent data regarding the market and its activities is readily available to all market participants and is always reflected in market prices.

Allocational efficiency occurs when parties are able to use the accurate and readily available data reflected in the market to make decisions about how to allocate their resources. When all of the data affecting a market is available for use in decisions, companies can make accurate decisions about what projects might be most profitable and manufacturers can allocate resources to producing products that are most desired by the general population. Allocational efficiency occurs when organizations in public and private sectors spend their resources on projects that will be the most profitable and do the most good for the population, thereby promoting economic growth.

Allocational efficiency can also be called allocative efficiency.

BREAKING DOWN 'Allocational Efficiency'

In order to be allocationally efficient, a market must be efficient. In order for a market to be efficient, it must meet the prerequisites of being both informationally efficient and transactionally or operationally efficient. When a market is informationally efficient, all necessary and pertinent information about the market is readily available to all parties involved in the market. No parties have an informational advantage over any other parties. When a market is transactionally efficient, all transaction costs are reasonable and fair, making all transactions equally executable by all parties. No transaction is prohibitively expensive for any party. If these conditions of fairness are met and the market is efficient, capital flows will direct themselves to the places where they will be the most effective, providing an optimal risk/reward scenario for investors.

RELATED TERMS
  1. Production Efficiency

    Production efficiency is a level at which the economy can no ...
  2. Allocation Rate

    An allocation rate is a percentage of an investor's cash or capital ...
  3. Strategic Asset Allocation

    Strategic asset allocation is a portfolio strategy that involves ...
  4. Efficiency Principle

    The efficiency principle states that an action achieves most ...
  5. Minimum Efficient Scale

    The minimum efficient scale is the least amount of production ...
  6. Tactical Asset Allocation - TAA

    An active management portfolio strategy that rebalances the percentage ...
Related Articles
  1. Financial Advisor

    Asset Allocation vs. Security Selection: The Main Differences

    Both are important to a long-term investment strategy, but asset allocation and security selection have different missions.
  2. Investing

    Understanding Production Efficiency

    Production efficiency is the point at which an economy cannot increase output of a good or service without lowering the production of another product.
  3. Investing

    What Is Tactical Asset Allocation?

    Here's how tactical asset allocation, an extension of strategic asset allocation, works.
  4. Investing

    Explaining Pareto Efficiency

    Pareto efficiency is an economic state where resources are allocated in the most efficient manner.
  5. Investing

    Strategic Asset Allocation to Rebalance Portfolios

    This involves setting allocations for various asset classes, then yearly rebalancing the portfolio when it deviates from the initial settings.
  6. Investing

    Why Asset Allocation Matters in Your Portfolio

    Asset allocation accounts for more than 90% of the investment process.
  7. Financial Advisor

    An Introduction to Asset Allocation

    A portfolio is only as strong as its asset allocation. To create the right one, investors need to determine their risk tolerance, time horizon and goals.
  8. Investing

    First Eagle: Mutual Fund With Both Stocks & Bonds

    Evaluate the composition of the First Eagle Global Fund, and study how the fund's makeup has evolved between March 2015 and March 2016.
  9. Managing Wealth

    Choose Your Own Asset Allocation Adventure

    There are many strategies to help balance your portfolio. Here are a few to get you started.
  10. Investing

    Portfolio Trends in 2016 (ARTIX)

    Evaluate the composition of the Artisan International Fund, and examine how its makeup has evolved between March 2015 and March 2016.
RELATED FAQS
  1. How Does an Efficient Market Affect Investors?

    The efficient market hypothesis refers to aggregated decisions of many market participants. Read Answer >>
  2. What do efficiency ratios measure?

    Learn about efficiency ratios, what they measure, how to calculate commonly used efficiency ratios and how to interpret these ... Read Answer >>
  3. What are some advantages of a market economy over other types of economies?

    Learn what a market economy is, the main assumption behind a market economy and some important advantages it has over other ... Read Answer >>
Trading Center