Asset Classes

Asset Classes

Fin 402: Investment Fundamentals and Portfolio Management

Determining the makeup of a portfolio is important in the effort to protect investments from the risk associated with securities and market fluctuations. Many investors opt to place their monies in mutual funds, which are diversified to greater or lesser degrees. Others merely choose stocks based on their inclusion in the Dow 30, the list of stocks that are used in determining the Dow Jones Industrial Average. However an investor determines where to place their money, it’s important to understand which asset class upon which the investment is based.

There are four general asset classes; stocks or equities, fixed income or bonds, money market funds or other cash equivalents, and real estate or other tangible assets (Investopedia, 2010). A well-rounded portfolio will not aggregate too much in one asset class, but rather be distributed to mitigate risk. We will be considering two investment opportunities here; Cisco Systems, Inc. common stock issue and shares in the American Funds “Capital World Bond Fund” mutual fund.

Mutual Funds invest according to the prospectus and fund description as guidelines. The Capital World Bond fund invests primarily government/agency, corporate and mortgage- and asset-backed bonds. It’s objective is “to provide, over the long term, a high level of total return consistent with prudent investment management”. The restrictions on the fund states that “The fund may invest up to 25% of assets in bonds rated below investment grade (BB and below) at the time of purchase, including high-yield corporate bonds or those issued by developing country governments and companies” (American Funds, 2010). Therefore, this mutual fund invests primarily in the asset class of bonds.

Cisco Systems, Inc offers shares of common stock to investors. These stocks fall into the stock/equities asset class. Common stock is a form of corporate equity ownership...