Final answer:
Asset allocation is the strategy of diversifying investments across different asset classes to manage risk without significantly increasing it (A).
Step-by-step explanation:
The strategy that focuses on diversifying across various asset classes without significantly increasing risk is A) Asset allocation. Asset allocation involves spreading investments across different categories such as stocks, bonds, and mutual funds. Diversification in this context helps in managing investment risk as it can iron out the ups and downs of investing. By not putting all your eggs in one basket, you are reducing the impact of a single underperforming asset on your overall portfolio.
Moreover, diversifying through mutual funds can provide broader diversification as they invest in a range of companies. Some companies within a mutual fund might perform better than others, but overall, the extremes in individual performance tend to cancel out, leading to more stable returns for the investor.
Asset allocation focuses on diversifying across various asset classes without significantly increasing risk. It is a strategy that involves spreading investments across different types of assets, such as stocks, bonds, and cash, to reduce the impact of any single investment on the overall portfolio. By diversifying, investors can potentially increase their chances of earning returns while minimizing the risk associated with a particular asset class or investment.
For example, suppose an investor allocates their portfolio to 50% stocks, 40% bonds, and 10% cash. If the stock market experiences a downturn, the impact on the investor's overall portfolio would be reduced because other asset classes, such as bonds and cash, may perform better during that time.