What does it mean when a portfolio is "overweighted" in a particular asset class?

When a portfolio is described as "overweighted" in a particular asset class, it means that the allocation to that asset class exceeds the normal or typical allocation found in a benchmark, which is used as a reference for comparison. This strategy is often employed by investors who believe that the asset class in question has the potential for higher returns compared to others and therefore deserve a greater share of the portfolio.

For example, if a benchmark suggests that 20% of a portfolio should be in stocks but the actual allocation is 30%, the stocks are considered "overweighted." This decision is usually based on the investor's analysis, market conditions, or anticipated performance of that asset class relative to others. The advantage of overweighting can come from the potential for enhanced performance if the asset class does indeed perform well.

Understanding this concept is vital for making strategic investment decisions and managing risk, as it reflects the investor’s outlook and confidence in particular market segments.