Question

Define what is meant by an investment portfolio. List and fully discuss key questions to answer and list asset classes and sub-asset classes that could be candidates for inclusion in a portfolio. Fully discuss key determinants for all asset classes and sub-asset classes.

Answer 1

An investment portfolio can be defined as a basket or set of assets that holds a variety of stocks, bonds, cash and other assets. The aim of investors is to gain maximum return by optimum mixing of these securities in such a manner that reflects their risk tolerance capacity and their financial goals.

The following may be defined as the primary asset class that could be candidates for inclusion in a portfolio.

1. Levels of equity- Equity levels provide higher long-term returns but comes at a higher level of volatility. The equities usually get greater shares in the profits of any organization but have many risks associated with it. So, it is like more risk and more reward situation. Key determining factor here will be the level of risk and reward expected by the investor.

2. Fixed income- Fixed income class ensures that they provide a fixed rate of return on a periodic basis. The return here is at a lower level but received by the investor at a fixed period. The key determining factor here will be the lower price deviations and fixed time interval of receiving the payments.

3. Cash investments- The cash investments ensure returns in the form of cash. This provide the lowest long-term return as compared to the other two asset classes but a lot of volatility is associated with it. The key determining factor here will be additional stability associated with the cash flows, stability of returns but volatility of payments and the opportunity cost.

Sub-asset classes are called as the subsets of broad asset classes.Different categories have characteristics that form the basis of diving the asset class. The various sub asset classes are-

1. Geography- The geographical conditions determine the kind of classification.

2. Size of the market- The entities are divided on the basis of their size in the total market.

3. Industry- The kind of industry the entity belongs are grouped as one