The correct answer is: B. weighting the portfolio return by the allocation.
Asset allocation is the process of dividing an investment portfolio among different asset classes, such as stocks, bonds, and cash. The goal of asset allocation is to reduce risk and maximize returns.
When an investor allocates their assets, they are essentially deciding how much of their money to invest in each asset class. The amount of money invested in each asset class is called the asset allocation weight.
The asset allocation weight of each asset class is determined by the investor’s risk tolerance, investment horizon, and financial goals.
The asset allocation weight of each asset class affects the overall return of the portfolio. For example, if an investor allocates 60% of their money to stocks and 40% of their money to bonds, the expected return of the portfolio will be higher than if they allocated 50% of their money to stocks and 50% of their money to bonds.
This is because stocks have the potential to generate higher returns than bonds, but they also have a higher risk of loss.
The asset allocation weight of each asset class also affects the risk of the portfolio. For example, if an investor allocates 60% of their money to stocks and 40% of their money to bonds, the risk of the portfolio will be higher than if they allocated 50% of their money to stocks and 50% of their money to bonds.
This is because stocks are more volatile than bonds.
The asset allocation weight of each asset class is an important decision that investors need to make. The asset allocation weight of each asset class affects the overall return and risk of the portfolio.
Here is a brief explanation of each option:
- A. altering the returns on individual assets: This is not correct because asset allocation does not affect the returns on individual assets. The returns on individual assets are determined by the performance of the assets themselves.
- B. weighting the portfolio return by the allocation: This is the correct answer because the asset allocation weight of each asset class affects the overall return of the portfolio.
- C. assuring diversification: This is not correct because asset allocation does not assure diversification. Diversification is achieved by investing in a variety of assets.
- D. increasing the investor’s use of mutual funds: This is not correct because asset allocation does not increase the investor’s use of mutual funds. The investor’s use of mutual funds is determined by their investment goals and risk tolerance.