An Asset Class is a group of investment vehicles that behave similarly and are subject to the same laws and regulations. Investment experts agree on three major asset classes
An Asset Class is a group of investment vehicles that behave similarly and are subject to the same laws and regulations. Investment experts agree on three major asset classes: equities (stocks), fixed-income (bonds) and cash equivalents (money market instruments).
In addition to these three main asset classes, some would consider real estate, commodities, foreign currencies and possibly other types of investments, to be asset classes. Whatever the asset class lineup, each one is expected to reflect different risk and return investment characteristics, and will perform differently in any given market environment.
Asset Classes Intrepretation
Asset classes are assumed to behave different from one another, with different risk/return characteristics and low correlation to other asset classes. By spreading one's investments across several asset classes, investors believe they are diversifying and hence minimizing risk.
Investment professionals have devised many different investment strategies based on asset classes including Modern Portfolio Theory (MPT), Tactical Asset Allocation (TAA) , and Dynamic Asset Allocation (DAA) among others.
Financial advisers may advise clients to allocate their investments to specific asset classes according to age. Typically the amount of investments assigned to stocks is (100 - age) % . The figure below provides an example asset class allocation for two investors.