What is meant by asset allocation?

Research has shown that 90% of the portfolio return variability can be explained by asset allocation.

By mixing a combination of bonds and equities, it is possible to adjust the risk of the portfolio and at the same time determine the potential return. A greater proportion to equities increase the risk of the portfolio but provide a potentially higher return on a long run. On the other hand a lower proportion to bonds decreases risk but also decreases potential return. It is important that what make up the bonds and equities are very important. If the bonds consists of non-investment grade bonds, it the risk of such bonds are high (not low). On the other hand, if the equities consists of all defensive stocks, than the long term return of such equity portfolio will be potentially low, not high.