Analyse the performance of each asset class and examine the relationships among them. Discuss the role each asset class plays in an investment portfolio.

A asset class refers to a group of investments with similar characteristics that are subjected to the same laws. Stocks, bonds, commodities and real estate are all common asset classes. When building an investment portfolio, it is important to consider the risks and benefits of each asset class.

Analyzing each asset class will give insight to their performance and how they interact. While stocks offer greater returns than bonds, they also have higher risk. However, bonds can be added to portfolios to protect against market volatility and economic downturns. Similar to stocks, various types of bonds like corporate and government have different levels of return/risk profiles. This could impact portfolio performance in a way that is not optimal. While commodities such as gold provide protection from inflation, real estate offers potential capital gains and rental income.

When designing an investment portfolio it is important to understand the role each asset class plays in helping you achieve your financial goals – whether it’s maximising returns or minimising risk. Diversification will reduce portfolio volatility, but excessive diversification could lead to poor returns if you don’t pay enough attention to any one area.