The investment decision hypothesis maintains that the most important portfolio decision is that of
Click on the arrows to vote for the correct answer
A. B. C. D.D
A good portfolio achieves the investor's desired risk/return profile through asset allocation. Typically a more diversified portfolio has lower risk.
The investment decision hypothesis suggests that the most crucial portfolio decision is that of asset allocation. Asset allocation refers to the process of distributing investments across different asset classes, such as stocks, bonds, real estate, and cash equivalents. It involves determining the optimal mix of assets in a portfolio based on an investor's financial goals, risk tolerance, and time horizon.
The rationale behind the importance of asset allocation stems from the recognition that different asset classes have varying levels of risk and return potential. By allocating investments among different asset classes, investors can potentially reduce their exposure to specific risks associated with individual investments. Diversification, which is another option mentioned in the answer choices, is an integral part of asset allocation.
Asset allocation is considered a critical portfolio decision because it has a significant impact on investment performance. Numerous studies have shown that asset allocation is responsible for a significant portion of the variability in investment returns. In fact, research suggests that asset allocation decisions outweigh the impact of specific security selection or market timing in determining long-term portfolio performance.
Financing, another option mentioned in the answer choices, refers to the methods and sources of funding used to acquire assets. While financing decisions are undoubtedly important, they are more focused on the means of acquiring assets rather than the selection of investments themselves. The investment decision hypothesis emphasizes that the allocation of investments across different asset classes is the primary determinant of long-term portfolio performance.
In summary, the investment decision hypothesis asserts that asset allocation is the most crucial portfolio decision. By strategically allocating investments across different asset classes, investors can potentially optimize their risk-return tradeoff and enhance long-term portfolio performance.