KEY POINTS

• The four major traditional asset classes are (1) common stocks, (2) bonds, (3) cash equivalents, and (4) real estate.
• One way of defining an asset class is in terms of the investment attributes that the members of an asset class have in common; a second way of defining an asset class is based simply on a group of assets that is treated as an asset class by asset managers.
• Nontraditional asset classes are referred to as alternative asset classes and include hedge funds, private equity, and commodities. Alternative assets typically are just different investment strategies within an existing asset class that derive their value from either the debt or equity markets
• Alternative asset classes can also be distinguished from traditional asset classes in terms of the efficiency of the marketplace in which the assets trade. No case can be made for active management strategies in an asset class that is viewed to be characterized as informationally efficient such as one finds in most traditional asset classes; with most alternative assets, information is difficult to acquire and there are opportunities for active management.
• An asset classes’ market (or systematic) risk premium is the difference in the return on an asset class and the return offered on a risk-free asset such as a U.S. Treasury security. Basic asset allocation seeks to capture the market risk premiums that exist for investing in different asset classes. Adding asset classes to the mix of potential investment ...

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