Asset Class

Asset Classes tend to form due to Regulations and Securities Laws. Within an Asset Class, securities can exhibit similar pattens of behaviour and Investment Vehicles can be subject to similar administrative oversight.

Market Regulations and Securities Laws are the most unifying factors in the formation of distinct asset classes. The most common groups of asset classes are stocks, bonds, cash deposits, real estate, commodities and currencies. As expected, quite diverse. Thus, a group of securities or investments could be considered as an asset class when they exhibit similar features, such as listing requirements for Stocks, administrative requirements for Funds or even a common Par Value for Bonds and either annual or semi-annual Coupon payment. Thus, it is often the case in trading individual quoted securities they behave in a similar fashion.

In the case of Investment Funds, they could be distinguished by the differing Investment Vehicles. The different vehicles could cater to differing complexities in the investment strategy. For example higher Leverage or Short Selling of securities. Between the various asset classes, the level of correlation in investment returns tends to be low or even could be negative. Regarding price volatility, this can be very different. Stocks have a higher volatility compared to Bonds. However, it is the case during severe market crises such as the 2008 GFC, correlations tend to move towards 1 as asset prices collapse. When investing, the important issue is to clearly understand the characteristics of the asset class.