Final answer:
The statement is true; asset allocation plays a key role in determining the risk/return characteristics of a pension fund. It involves distributing investments among various classes to balance risk and return, affected by factors like liquidity and life stage investment strategy.
Step-by-step explanation:
The statement that the majority of a pension fund's risk/return characteristics are explained by asset allocation is True. Asset allocation refers to the way in which the assets of a pension fund are distributed among different categories of investments, such as stocks, bonds, mutual funds, and other tangible assets. Each category has its own risk and return profile and the combination of these determines the overall risk and return characteristics of the portfolio.
Mutual funds and stock index funds offer high liquidity, allowing for easy conversion into cash, which is advantageous for investors. Diversification through mutual funds can lead to increased expected returns without a significant increase in risk, although costs can be higher. When considering investment decisions, tradeoffs between risk and return, especially in relation to one's stage in life, are crucial.