Asset Class

When a group of securities that portray similar features and characteristics, behave similarly in the market place in terms of volatility and is subject to identical laws and regulation, they belong to the same class of asset. The main categories of asset classes are: 

• Stocks or equities that provide fixed income or bond that pay a fixed rate of interest over a given period of time and provides greater stability than stocks. 
• Cash equivalent and money market instruments including foreign currency. 
• Real estate 
• Commodities like copper, gold, crude oil, natural gas.

Advisors and analysts consider investment carriers as asset class categories which are useful for diversification. Every class depicts varying rates of risk and return, characteristics and different performance in markets. It is advised that to maximise return and reduce portfolio risk one must invest in different classes of assets. Asset classes have varied cash flows which accommodate the investors to diversify their portfolio since it increases the probability of returns. 

The two theories adopted to analyse the criteria of performance are: 

1. Evaluation metrics- Ratios like PE ratio and EPS 
2. Asset class- The profit yield from one asset can help offset the loss from another asset.  The objective of asset allocation is to have a mixed bag of assets that maximise return and minimise losses while meeting ones-

• capability to withhold risk,
• investment objectives,
• preference for investments in specific asset classes.

Thank You
Regards
Author- Kaushal Shah
Kautilya

IBS Mumbai