Which investment strategy involves dividing a portfolio among different asset categories?

The concept of asset allocation is fundamental to investment strategy as it pertains to the distribution of investments across various asset categories, such as stocks, bonds, real estate, and cash equivalents. This approach is designed to balance risk and reward by adjusting the proportions of each asset category based on an investor's goals, risk tolerance, and investment horizon.

By dividing a portfolio among different asset categories, asset allocation seeks to optimize returns while minimizing risk. Different asset classes react differently to economic conditions, and by having a diverse mix, investors can potentially cushion their portfolios against market volatility. For instance, if stocks are performing poorly, bonds might provide stability, thereby reducing the overall risk of the investment portfolio.

Other choices such as market timing, risk assessment, and diversification are related concepts but do not specifically refer to the systematic approach of allocating capital across various asset classes. Market timing focuses on trying to predict the future movement of markets, while risk assessment involves evaluating the levels of risk associated with specific investments. Diversification is a strategy that can arise from asset allocation, but it is more about spreading investments within a single asset category to reduce risk rather than the division of a portfolio among different categories.