Problem Set 6 - Solutions
What are the main assets classes, and what are their important features?
Cash and deposit type
products – ST, highly liquid, low fixed returns, very low risk,
– ST, MT, LT, risk varies from very safe (government and semi-
government, some corporations), to quite risky (firms with unreliable history of
revenue, profits, returns, etc.), medium fixed returns, can be marketable but market
can be thin (not as liquid as shares)
– MT to LT, can be quite risky, and returns can be variable, from low to
high depending on type of share and its performance, volatile market subject to
considerable variation of returns, risks, returns in line with company performance,
good prospects for trading unwanted shares on ASX (if listed), so can be liquid.
– LT investment, returns and risk can be high but this market is subject to
business cycle movements and so ST returns and risks can be considerable, direct
investment is very illiquid
Financial advisers usually recommend to clients that it is important that they
consider diversifying investments within and across asset classes. Explain what this
means and why it is important. In which other ways can one diversify?