Which term describes the strategy of distributing assets to manage risk?

• A. Price elasticity
• B. Investment allocation
• C. Market speculation
• D. Risk assessment

Answer: (B)

The strategy of distributing assets to manage risk is best described as investment allocation. This involves spreading investments across various asset classes, geographical locations, or sectors to minimize the potential impact of adverse events on a portfolio. By diversifying, an investor can reduce volatility and increase the likelihood of achieving stable returns, as different assets can perform differently under various market conditions.

Investment allocation is a key component of risk management because it allows investors to tailor their exposure according to their risk tolerance and financial goals. A well-allocated portfolio can help cushion against losses when certain assets underperform while capturing upside potential in others that do well.

In contrast, price elasticity, market speculation, and risk assessment address other financial concepts. Price elasticity relates to how the quantity demanded of a good changes in response to price changes, market speculation involves engaging in high-risk investments with the hope of profiting from short-term market movements, and risk assessment focuses on identifying and analyzing potential risks associated with investment decisions. While these concepts are important in finance, they do not specifically describe the strategy of distributing assets to manage risk as effectively as investment allocation does.