What does the term asset allocation mean?

Asset allocation refers to the strategy of distributing investments among various asset categories, such as stocks, bonds, real estate, and cash equivalents. This process is essential as it allows investors to balance risk and return based on their individual financial goals, time horizon, and risk tolerance.

By diversifying their portfolio across different asset classes, investors can potentially reduce risk, as the performance of different categories often varies under different market conditions. This means that if one asset class performs poorly, others may perform well, which helps to stabilize overall portfolio returns.

The other options focus on more specific aspects of investing that do not encompass the broader strategy of distributing investments. Investing exclusively in stocks limits the breadth of a portfolio, a selling strategy does not address allocation, and calculating investment returns pertains to performance measurement rather than the distribution of investments across asset classes. Overall, the concept of asset allocation is a foundational principle of investment management aimed at optimizing risk and return.