Which term describes the strategy of distributing investments across various asset classes to manage risk?

• A. Asset Allocation
• B. Diversification
• C. Market (Systematic) Risk
• D. Company (Non-Systematic) Risk

Answer: (A)

Distributing investments across different asset classes to manage risk is asset allocation. This approach sets the overall mix among broad categories like stocks, bonds, cash, and sometimes alternatives, with the goal of balancing potential return and risk based on your goals, time horizon, and risk tolerance.

Diversification is related but different: it refers to spreading investments within and across asset classes to reduce the impact of any one investment's poor performance. Market (systematic) risk is the risk inherent to the entire market and cannot be eliminated by diversification alone, while company (non-systematic) risk is specific to a single company or industry and can be mitigated through diversification.

So the term describing the strategy of distributing investments across asset classes to manage risk is asset allocation.