How is asset allocation defined in investment practice?

Asset allocation is fundamentally defined as the process of distributing resources among different asset categories such as stocks, bonds, real estate, and cash. This approach aims to optimize the balance between risk and return in an investment portfolio, enabling investors to align their investment strategy with their financial goals, risk tolerance, and investment horizon. By diversifying investments across various asset classes, investors can mitigate risk and potentially enhance returns, as different assets often react differently to market conditions.

The other options focus on aspects of investment practice that do not specifically define asset allocation. Evaluating market trends pertains to market analysis rather than the distribution of assets. Investing in a single asset class limits diversification, which is contrary to the principles of asset allocation. Analyzing inherent risks of a portfolio is related to risk assessment but does not encapsulate the entire concept of asset allocation, which inherently involves the distribution of investments across multiple asset categories.