A group of investments that behave similarly in the market, and are subject to the same regulations. Today, the three main asset classes recognized are equities, bonds, and cash equivalents. Although real estate and commodities are included by some professionals as well, these investments typically fall in the alternative investment category.
Investments within an asset class are associated based on their underlying fundamentals. For example, fixed income investments are grouped because of their similar financial structure, and equities are grouped together because of what they represent and how they are traded. Because the fundamentals of each class differs, each represents a different risk and return profile. By allocating across different asset classes, investors may be able to achieve a degree of diversification in their portfolio. Diversification, however, does not guarantee profits or protect against losses.