Assets classes

Asset class Description of asset Glass life,yr MACRS recovery period, yr... 

Lamm, R. McFall Ghaleb-Harter, Tanya E. 2001. Private Equity as an Asset Class Its Role in Investment Portfolios. Journal of Private Equity, vol. 4, no. 4 (Fall) pp. 68-79. 

Describe and discern among alternative asset classes. 

As discussed previously, if you cannot tolerate your investment portfolio declining by 30% percent in one year, you do not want to have an all-stock portfolio (because the largest historical one year decline was 43.3%). But how should you allocate your resources Suppose that you can tolerate a 20% decline or a 10% decline Based on historical returns and using large stocks and long-term bonds as major asset classes to design a portfolio, you should not have more than 40% stocks in your portfolio ifyou cannot tolerate agreater than 20%... 

A common mistake committed by naive users of MV analysis is to use recent returns, risk, and correlation as predictors of the future. PortfoUos produced using such linear extrapolation methods normally exhibit poor performance. Table 2 shows historical returns and risk for various asset classes over the last decade. A variety of extraneous market developments, shocks, and one-time events produced these results. Rest assured that future time paths wiU not closely resemble those of the 1990s. For this reason, while one cannot ignore history, extending past performance into the future is a poor technique. 

The primary advantage of hedge fund portfohos is that they have provided double-digit returns going back to the 1980s with very low risk. Indeed, hedge fund portfolio volatility is close to that of bonds. With much higher returns and low correlation compared with traditional asset classes, they exhibit the necessary characteristics required to enhance overall portfolio perfotmance. 

Despite the attractive characteristics of TIPs, they have met with limited market acceptance. This is a consequence partly of a lack of awareness but also because TIPs significantly underperformed conventional Treasury securities as inflation dechned immediately after their introduction in 1997. However, for the first time in years, inflation is now rising and TIPs have substantially outperformed Treasuries over the last year. This wiU likely change investor attitudes and lead to greater acceptance of the asset class. 

Finally, there are a number of structured derivative products often marketed as new asset classes. Such products are usually perturbations of existing assets. For example, enhanced index products are typictdly a weighted combination of exposure to a specific equities or bond class, augmented with exposure to a particular hedge fund strategy. Similarly, yield-enhanced cash substitutes with principal guarantee features are composed of zero coupon Treasuries with the residual cash invested in options or other derivatives. Such products are part hedge fund and part primary asset from an allocation perspective and are better viewed as implementation vehicles rather than incorporated exphcitly in the asset allocation. 

Lamm, R. M., and Ghaleb-Harter, T. E. (2000b), Hedge Funds as an Asset Class An Update on Performance and Attributes, Deutsche Asset Management research monograph, March 6. 

Assessments, energy, 1578-1579 Asset classes, 758-761 currencies, 761 enhanced index products, 761 hedge funds, 759, 760 insurance-linked products, 761 private equity and ventme capital, 759-761 Treasury inflation-protected securities (TIPs), 761... 

It is possible to generalise Ito s formula in order to produce a multi-dimensional formula, which can then be used to construct a model to price interest-rate derivatives or other asset-class options where there is more than one variable. To do this, we generahse the formula to apply to situations where the d5mamic function/() is dependent on more than one Ito process, each expressed as a standard Brownian motion. 

Ranaldo, A., Eckmann, A., 2004. Convertible Bonds Characteristics of an Asset Class. UBS Global Asset Management. 

Portfolio risk management These bonds assure the price protection to portfolios by changes in interest rates. Moreover, they show a low correlation with other asset classes, including bonds. 

Nonetheless, a lot of high-yield investing is done by funds dedicated to the asset class. Drivers of market performance also differ. For these reasons, we have chosen to discuss the high-yield asset class separately from high grade. 

The third phase of the European high-yield market s evolution appears to be following the US market s model, with an increased focus on higher qnality issuers, more investor-friendly debt structures, and expansion of the asset classes accessed by institutional investors. 

The objectives of this chapter are to discuss the benefits of the inflation-linked asset class to both issuers and investors, to provide brief histories and salient characteristics of the different European inflation-linked markets (both bonds and derivatives), and to introduce key analytical and trading concepts. 

THE CONTINUING NEED FOR THIS ASSET CLASS IN A LOW-INFLATION WORLD... 

Inflation-linked bonds also have different behavioural characteristics to other assets. They form a distinct asset class offering portfolio diversification benefits. This can be demonstrated using efficient frontier analysis. However, we should bear in mind what has already been said in the... 

On this basis, there is a huge urge to say you can t do it, but we must try to offer something a little more constructive. Nobody ever asks what the duration of an equity is, but the question is almost equivalent—linkers, like equities, are a different asset class. There are equity duration measurements—price sensitivities with respect to changes in the earnings yield or dividend yield—and equities can be related to nominal bonds via a Fisher equation as we have shown, just as linkers are related to nominals via a Fisher equation. However, equity duration numbers are seldom calculated, and would never be used in a mixed portfolio of equities and bonds to give a total portfolio duration. 

A QUICK SKETCH OF THE PBffORMANCE CHARACTBUST1CS OF INFLATION-LINKa BONDS REAT1VE TO OTHR ASSET CLASSES... 

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