Thevalue of investmentincreaseson account of which of the following?2 pointsa) Asset allocationb) Compound interestc) Inflationd) Diversification

The value of an investment can increase due to several factors:

a) Asset Allocation: This is the strategy of balancing risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon. The three main asset classes are equities (stocks), fixed-income (bonds), and cash and equivalents. Each has different levels of risk and return, so each will behave differently over time.

b) Compound Interest: This is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.

c) Inflation: Inflation can indirectly increase the value of an investment. If an investment yields a return higher than the rate of inflation, it will increase in value in real terms. However, if the rate of inflation is higher than the return on investment, the investment will decrease in value in real terms.

d) Diversification: This is a risk management strategy that mixes a wide variety of investments within a portfolio. The rationale behind this technique is that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. Diversification strives to smooth out unsystematic risk events in a portfolio, so the positive performance of some investments neutralizes the negative performance of others.