Evaluation Of Asset Classes
Portfolio management is composed of using various capital market instruments and asset classes. Asset classes are categorized in to three main types, money market securities, debt securities, and equities. Each asset class will give an investor different amounts of risk and returns. The portfolio manager’s job is to find the right mix of asset classes for the economic conditions and purpose of the portfolio.
MONEY MARKET SECURITIES
The money market securities are short-term instruments that provide a fixed-rate return and liquidity because of their short time until maturity. The time to maturity of these instruments is under 1 year. This asset class has the least amount of risk because of the short time horizon of the investment. Here are some examples of the more popular money market securities.
· Certificates of Deposit (CD’s)
· Treasury Bills
· Bankers Acceptance
· Commercial Paper
The debt securities are long-term investments that provide a fixed return but include more risk than market securities because of the time horizon of the investment. The time to maturity of these instruments is over 1 year. This asset class does not provide an investor with liquidity and the expected return should be higher than the money market securities because of the increase in risk. Here are some examples of the more popular debt securities.
· Corporate Bonds
· Commercial Paper
· Mortgage-Back Bonds
· US Treasury Bonds
The final asset class is the equities class that provides the investor with the greatest amount of risk and return. These securities are liquid because of their tradability in the secondary markets. Equities will provide a return to investors through capital market gains and dividend payments. Here are some examples of equity securities.
· Common Stock
· Preferred Stock
· Mutual Funds
Asset classes provide investors and managers options of allocating funds to create value through various conditions. Portfolio’s with a large percentage of market securities provides the managers and investors with liquidity for future investments, a fix rate of return, and the lowest level of risk from any of the asset classes. A portfolio with a high percentage of bonds will provide managers and investors with a fix rate of return, low risk but decreases the liquidity of the portfolio to invest in opportunities. Portfolio with large percentages of equities will provide the managers and investors with the highest potential returns, most risk, and liquidity to transfer funds to other opportunities. A portfolio strategy should match the investment’s purpose, and asset classes should be used to increase or decrease risk and return potential for each economic condition that influences the portfolio’s value.