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Definition of Asset Classes

What is an asset class?

            An asset class is a “group of securities that exhibit similar characteristics and behave similarly in the marketplace and are subject to the same laws and regulations.” (Investopedia. 2009). Asset classes are broken down into three main groups; equities (stocks), fixed income (bonds) and cash equivalents (money market instruments). Depending on the investment professional, some may add real estate and commodities to the list of asset classes.

How are asset classes selected?

            Each asset class is selected with the intent to represent different risk and return characteristics. It is important to select asset class based on individual portfolio, particularly risk tolerance levels. Asset classes are used as a diversification technique and a portfolio can contain individual asset classes or a blended amount of many dependent upon the investor’s objective.

What types of factors impact the selection of asset class?

            The factors that impact the selection of asset classes determine upon the investor. For purposes of a well-balanced, diversified portfolio all asset classes should be incorporated. The equity class gives the investor the growth, the fixed income gives the stability and security and the cash equivalents give the investor liquidity. Additionally, an investor’s time frame is important to take into account.
Investopedia.com         (2009).             Asset Class.
Retrieved on June 18, 2009 from www.investopedia.com.

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