What does "asset allocation" involve?

Asset allocation involves the process of distributing investments among different asset categories, such as stocks, bonds, real estate, and cash. This strategy is essential in managing risk and optimizing returns. By diversifying investments across various asset classes, investors can mitigate the impact of market volatility and reduce the likelihood of significant losses. Each asset category typically reacts differently to market conditions, and a well-designed asset allocation strategy helps in balancing risk and potential returns according to an investor's goals, risk tolerance, and investment horizon.

Other options focus on narrower aspects of investing, such as evaluating individual investments or concentrating investments in a single type of asset, which does not encompass the broader strategy and intent behind asset allocation.