Asset Class - Explained
What is an Asset Class?
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Table of ContentsWhat is an Asset Class?How is an Asset Class Used?Asset Class and Investing StrategyAsset Class TypesAcademic Research on Asset Class
What is an Asset Class?
In finance and investment, an asset class is a group of assets or investments that have similar characteristics. Investment vehicles that are similar in nature and are bound by the same laws and regulations are grouped into an asset class. There are three major asset classes, these are;
- Fixed income or bonds
- Equities or stocks
- Money market instruments, cash equivalent.
The investment vehicles in an asset class exhibit similar behaviors when traded in the market and have similar performance.
How is an Asset Class Used?
An asset class comprises of investment or assets a correlation or similar traits. There are varieties of assets mixed as created by investment professionals but the commonly recognized classes of assets are equities, fixed income, and money market instruments. Usually, asset classes have meant to have diverging returns and risks, this means that two asset classes perform differently when traded in the same market. Asset classes are used by portfolio managers or investment management firms for diversification purposes. By selecting different classes of assets of varying levels of risks and returns, portfolio managers seek to maximize profit and reduce risk. Here are some important points to know about asset class;
- An asset class refers to a grouping of investment vehicles with similar characteristics and similar performance when traded in the market.
- There are three major asset classes, these are equities, fixed income and cash, cash equivalents. Investment managers also have some asset mix class with include financial derivatives, commodities, futures contract and others.
- Different asset classes have varying levels of risk and returns, find managers and financial advisors focus on using asset classes to achieve diversification of a portfolio.
Asset Class and Investing Strategy
There are certain investment strategies used by investors and fund managers where asset classes are considered. Investment strategies use various factors that help them categorize assets that reduce the risk of the investment portfolio and maximize profit. In certain cases, the performance of an investment is linked to the asset class that make up the investment. While some investors are particular about the investment performance, others are concerned about the asset class, these two, however, remain inseparable to a certain degree.
Asset Class Types
There are three types of asset class, that are;
- Equities or stocks
- Fixed-income securities or bonds
- Cash, cash equivalents and other marketable Securities
These asset classes are the most popular costs. Aside from these classes of asset, there are other mix classes of assets known as alternative assets.
Academic Research on Asset Class
- What is an anasset class, anyway?, Greer, R. J. (1997). What is an an asset class, anyway?.Journal of Portfolio Management,23(2), 86.
- Infrastructure as anasset class, Inderst, G. (2010). Infrastructure as an asset class.EIB papers,15(1), 70-105. Infrastructure as a new asset class is said to have several distinct and attractive investment characteristics. This article reviews concepts, market developments and empirical evidence on the risk-return and cash flow profile, and the potential for diversification and inflation protection in investor portfolios. Furthermore, a new, global analysis of the historical performance of infrastructure funds is undertaken. There is no proper financial theory to back the proposition of infrastructure as a separate asset class. Infrastructure assets are very heterogeneous, and empirical evidence suggests an alternative proposition that treats infrastructure simply as a sub-asset class, or particular sectors, within the conventional financing vehicle on which it comes (e.g. listed and private equity, bonds).
- US REITs as an asset class in international investment portfolios, Mull, S. R., & Soenen, L. A. (1997). US REITs as an asset class in international investment portfolios.Financial Analysts Journal,53(2), 55-61. An examination of U.S. real estate investment trust (REIT) efficiency as a portfolio component from the perspective of all G-7 countries for the period 1985 through 1994 indicates that U.S. REITs offer both an inflation hedge and diversification. Nevertheless, including REITs in test portfolios did not yield statistically significant increases in risk-adjusted return over the period as a whole. Subperiod analyses indicated large temporal differences in REIT efficiency as a portfolio component.
- Wine as an Alternative Asset Class*, Masset, P., & Henderson, C. (2010). Wine as an alternative asset class.Journal of Wine Economics,5(1), 87-118. Using a dataset that spans the period 1996 to 2007 and contains transaction prices for all reported auctions at the Chicago Wine Company, we analyze how the prices of high-end wines have evolved during this time period. The best wines according to characteristics like vintage, rating and ranking earn higher returns and tend to have a lower variance than poorer wines. Nevertheless, the different categories of wines seem to follow a rather similar trend over the long run. Wine returns are only slightly correlated with other assets and can consequently be used to reduce the risk of an equity portfolio. Wine looks even more attractive when the investor also has concerns about the skewness of his portfolio. However, the part to be invested in wine is reduced once the kurtosis is included into the analysis. Finally, it seems advisable to diversify across different wine categories as their short-run movements are partially independent of each other. First growths and wines rated as extraordinary by Robert Parker deliver the best tradeoff in terms of portfolio expected returns, variance, skewness and kurtosis for most investor preference settings under consideration. (JEL Classification: C60, G11, Q11)
- Insurance derivatives: a new asset class for the capital markets and a new hedging tool for the insurance industry, Canter, M. S., Cole, J. B., & Sandor, R. L. (1997). Insurance derivatives: a new asset class for the capital markets and a new hedging tool for the insurance industry.Journal of applied corporate finance,10(3), 69-81. The number and severity of natural catastrophes has increased dramatically over the last decade. As a result, there is now a shortage of capacity in the property catastrophe insurance industry in the U.S. This article discusses how insurance derivatives, particularly the Chicago Board of Trade's catastrophe options contracts, represent a possible solution to this problem. These new financial instruments enable the capital markets to provide the insurance industry with the reinsurance capacity it needs. The capital markets are willing to perform this role because of the new asset class characteristics of securitized insurance risk: positive excess returns and diversification benefits. The article also demonstrates how insurance companies can use insurance derivatives such as catastrophe options and catastrophe linked bonds as effective, low cost risk management tools. In reviewing the performance of the catastrophe contracts to date, the authors report promising signs of growth and liquidity in these markets.