Asset allocation is the most important investment decision we will ever make

Asset allocation is the most important investment decision we will ever make, and sadly, most of us do not give that decision the importance it deserves. We are adamant about seeking predictability with our future. We tend to think of investing in risky assets as extremely volatile and value eroding.

We also dislike fluctuating returns and the loss of control of investment. We think our money is best left idle, unproductive but safe. There is no asset that is risk free. We could lose our jobs, our homes can lose value, our banks can go bankrupt, our bonds can default, the government can collapse and companies we chose fondly may cease to exist. But we cannot live life assuming that all these extreme events are waiting to happen, and all at the same time. All these extreme forms of risks we know will not manifest at the same time.

Which one of the following statements best implies the suggestion given by the author of the passage?

  1. Distribute your wealth across different kinds of assets so that your risks would be minimized.
  2. Risk-taking behaviour should be a necessary component of your personality if you want to generate wealth.
  3. While making investments, find a trustworthy asset management organization which would manage your wealth for you.
  4. You should know that investing your money is a risky business.

Answer: A

Explanation

Option A is correct: The passage, right at the beginning, clearly states that asset allocation is the most important investment decision that one would ever make. Further on, in the passage, the author links such asset allocation to predictability and risks.

Option B is incorrect: Though the option is correct, as it has merit independently. However, the passage does not talk about wealth generation per se.

Option C is incorrect: The passage nowhere mentions or refers to an asset management company. In fact, the tone of the passage is of individuals taking such investment decisions by themselves.

Option D is incorrect: Fourth statement is the base on which the author has made suggestion.

  • Exam Year: 2020