CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

23.2 REAL ASSETS AND FINANCIAL ASSETS

Commodities are real assets. Real assets are sometimes called economic assets, as they can be used or consumed. They are tangible and intangible assets with intrinsic value that offer a reasonable expectation of inflation protection. Real estate, factories, patents, certain types of real options, and human capital are examples of real assets. Economists distinguish between two types of real assets: durable and nondurable. Durable assets are employed in the production of wealth but are not consumed in the process. Materials are used during production and can be either durable or nondurable. For example, production of airplane travel uses durable assets (airplanes, airports) as well as nondurable assets (jet fuel, roasted peanuts, etc.) that are used up in the production process. Many other inputs are also required for airplane travel, of course, including human capital (pilots, ground crews) and management of these assets by corporate executives.

Financial assets are claims on the income that is derived from the use of real assets. A financial asset may also have an ownership claim on the real assets themselves. For example, the stockholders of an airline company are entitled to share in the income generated by using real assets such as airplanes, jet fuel, and peanuts. If the airline company owns the airplanes, the stockholders will also share in the profits or losses when airplanes are sold.