Definitions (source: Barron's Dictionary of Finance and Investment Terms)

Asset Allocation: apportioning of investment funds among categories of assets, such as cash equivalents, stock, fixed-income investments, and such tangible assets as real estate, precious metals, and collectibles. Also applies to subcategories such as government, municipal, and corporate bonds, and industry groupings of common stocks. Asset allocation affects both risk and return and is a central concept in personal financial planning and investment management.

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Diversification: spreading of risk by putting assets in several categories of investments -- stocks, bonds, money market instruments, and precious metals, for instance, or several industries, or a mutual fund, with its broad range of stocks in one portfolio.

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Hedging: strategy used to offset investment risk. A perfect hedge is one eliminating the possibility of future gain or loss. Example: A stockholder worried about declining stock prices can hedge his or her holding by buying a put option on the stock or selling a call option. Someone owning 100 shares of XYZ stock, selling at $70 per share, can hedge his position by buying a put option giving him the right to sell 100 shares at $70 at any time over the next few months. This investor must pay a certain amount of money, called a premium, for these rights. If XYZ stock falls during that time, the investor can exercise his option -- that is, sell the stock at $70 -- thereby preserving the $70 value of XYZ holdings.

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