Final answer:
Asset allocation involves distributing money across various financial assets to manage risk through diversification, not to eliminate it. Mutual funds, which include a mix of stocks and bonds, are an accessible way for investors to diversify their portfolios.
Step-by-step explanation:
Asset allocation is indeed the process of allocating money across financial assets, such as stocks, bonds, and mutual funds. However, the objective of asset allocation is not to eliminate risk altogether, which is impossible, but to manage and reduce risk through diversification. Diversifying an investment portfolio helps to mitigate the impact of poor performance in any single investment. By investing in a variety of financial instruments, including stocks, bonds, and mutual funds, risks associated with individual assets can be spread out. Hence, while it can reduce risk, it cannot completely eliminate it.
The concept of diversification follows the proverb 'Don't put all your eggs in one basket', meaning spreading investments across different assets can help offset losses in one area with gains in another. Mutual funds are a popular way to achieve diversification, as they invest in a diversified portfolio of stocks and bonds, which may reduce the risk compared to investing in single stocks or bonds.