The correct answer is D. Asset allocation.
Asset allocation is the process of dividing a portfolio’s assets among different asset classes, such as stocks, bonds, and cash. It is the most important investment decision because it determines the risk-return characteristics of the portfolio.
A well-diversified portfolio can help to reduce risk and maximize returns. By investing in a variety of assets, investors can reduce their exposure to any one asset class or sector. This can help to protect their portfolio from losses if one asset class or sector experiences a decline.
In addition, asset allocation can help to improve returns. By investing in assets that have different risk and return characteristics, investors can create a portfolio that has the potential to generate higher returns than a portfolio that is invested in a single asset class.
Hedging is a technique used to reduce risk by offsetting one investment with another. For example, an investor who owns stocks might hedge their position by buying put options on the stock. This would protect them from losses if the stock price falls.
Market timing is the attempt to buy and sell assets at the right time in order to profit from market movements. However, market timing is very difficult to do successfully, and most investors are better off not trying to time the market.
Performance measurement is the process of evaluating the performance of an investment portfolio. This can be done by comparing the portfolio’s returns to a benchmark, such as the S&P 500. Performance measurement can help investors to determine whether their portfolio is meeting their investment goals.