Classes of Assets

Classes of Assets

Portfolio management is the process of managing an investment portfolio, which consists of a collection of assets. These assets can be classified into different categories based on their characteristics, risk profile, and investment objectives. In general, there are four major classes of assets under portfolio management: stocks, bonds, cash, and alternative investments.

Stocks are ownership shares in a company, and they represent a portion of the company’s assets and earnings. Stocks are generally considered to be riskier than other asset classes, but they also have the potential for higher returns. Investors can invest in individual stocks or in mutual funds, which are collections of stocks managed by professional portfolio managers.

Bonds are debt securities issued by governments, corporations, or other organizations. When an investor buys a bond, they are essentially lending money to the issuer in exchange for regular interest payments and the return of their principal investment at the end of the bond’s term. Bonds are generally considered to be less risky than stocks, but they also have lower potential returns.

Cash refers to cash equivalents, such as savings accounts, money market funds, and short-term Treasury bills. Cash is the least risky asset class, but it also offers the lowest potential returns. Cash is typically used as a safe haven for investors during times of market uncertainty.

Alternative investments include a wide range of assets, such as real estate, commodities, and hedge funds. Alternative investments are generally considered to be riskier than traditional asset classes, but they also have the potential for higher returns. Alternative investments are often used by sophisticated investors to diversify their portfolios and hedge against market risks.

Asset classes are the building blocks of any investment. The four main asset classes are cash, fixed interest, property and shares. Cash and fixed interest asset classes are what is called ‘defensive’ assets. This means that they are designed to defend the investment from losses. These tend to be more popular for short-term or risk averse investors – those who prefer safer, more secure investments with some consistency in returns.

Property and shares are ‘growth’ assets because they are designed to grow the investment. These are higher risk and more volatile assets. They are designed for long-term or aggressive style investors willing to ‘ride out’ the peaks and troughs of their investment, due to their potential for higher investment returns. Each asset class has its own specific advantages and disadvantages that should be taken into consideration while creating an investment portfolio. Since all asset class differ in risk and return characteristics, they impact one’s financial objectives.

 

Back to Tutorial