1- What are the major asset classes?

** Asset classes are separated in the basis of:

- Risk and return profile: some asset classes, like stocks have potential for higher returns but also
higher volatility. On the other hand, bonds are lower risk but also offer lower returns.
- Correlation: how closely the price movements of two assets are related. Asset classes with low
or negative correlations can help reduce portfolio risk.
- Liquidity: Refers to the ease with which an asset can be converted into cash. Highly liquid assets,
like stocks, are easier to trade, while less liquid assets such as real estate investments may take
longer to convert into cash.
- Income generation: Bonds are known for generating regular income through interest, while
stocks focus more on capital appreciation.
- Underlying assets type: physical goods such as gold are commodities, while bonds are debt
instruments

** US Treasury bills are often considered to be part of the “Cash and Cash equivalents” asset class
rather than fixed income due to a few unique characteristics:

- They have shorter maturities ranging from a few days to a year

- Treasury bills are more liquid due to their shorter maturities and less potential for price changes
because of interest rates, while for fixed income is the opposite.
- When interest rates rise, the prices of longer-term bonds tend to fall more than those of shorter
termed bonds. This reduced price sensitivity aligns it more closely to cash equivalents.
- While both T-bills and traditional fixed income securities are considered relatively low-risk
investments, T-bills are often seen as even lower in risk due to their short-term nature and the
backing of the U.S. government. This makes them an even closer approximation to cash in terms
of risk and safety.

** The “Cash and Cash Equivalents” asset class refers to highly liquid and low-risk investments that are
easily convertible to cash. They have short term maturities, typically within three months or less. In a
portfolio, they are used to provide stability, liquidity, or to take advantage of investment opportunities.
It's important to note that while cash and cash equivalents offer liquidity and safety, they generally
provide lower returns compared to other investment options with higher risk profiles. These are the
following types of instruments:

- Money market funds: Mutual funds that pool money from investors to invest in a diversified
portfolio of short-term, low-risk securities. These funds are managed by fund managers and are
designed to provide investors with a safe place to park their cash while earning a modest return
that is generally higher than traditional saving accounts. ** A mutual fund is a financial vehicle
that pools assets from many investors to invest in securities like stocks, bonds, and other
investments. They are run by professional money managers who decide which securities to buy
and sell (bonds, stocks, etc.).
- Money market funds invest in a variety of short-term securities, including:
o Treasury bills: Short term debt obligations issued by the U.S. government. They are
considered one of the safest investments due to the government’s backing.
o Commercial paper: Short term debt instrument issued by corporations and financial
institutions to raise funds for short-term operational needs.
o Certificates of Deposit (CDs): A type of savings account offered by banks and credit
unions. You generally agree to keep your money in the CD without taking a withdrawal
for a specified length of time. Withdrawing money early means receiving a penalty fee
from the bank.
o Repurchase Agreements (Repos): These are transactions where one party sells a security
to another party with an agreement to repurchase it at a later date, often the next day,
at a slightly higher price.
o Short-Term government and Corporate bonds: Money market funds may also invest in
short-term government and corporate bonds with maturities typically under one year.
- Cash on hand: Physical currency and coins
- Bank deposits: Funds held in bank accounts that can be easily withdrawn without any significant
delay. This includes checking accounts and bank accounts. **Some banks might offer a minimal
interest rate on checking account balances, but this rate is generally much lower than what you
would earn with other types of accounts, such as savings accounts or certificates of deposit
(CDs).
- Treasury bills: Short-term government securities ranging from a few days to one year. They are
considered virtually risk-free and are often used as cash equivalents. T-bills can also be
considered as part of the cash equivalent asset class due to their high liquidity and short-term
maturity, making them suitable for quickly accessing funds with minimal risk.
- Commercial paper
- Short-term government bonds: Government securities with short maturities that are considered
low-risk.
- Highly liquid marketable securities: Short-term investments in marketable securities that are
easily tradable, such as money market instruments. **Marketable securities are financial
instruments that are easily tradable in the secondary market, meaning they can be bought and
sold with ease.
- Certificate of Deposit (CD): **They are fixed income investments due to their predetermined
interest rate and maturity, but they are also highly liquid and can serve as a short-term store of
cash. However, in traditional investment classifications, they are more commonly grouped
under the fixed income asset class due to their nature as interest-bearing securities.
- Money Market Deposit Accounts (MMDAs): Interest-bearing accounts offered by banks that
combine features of savings and money market accounts. **Meanwhile, a simple money
market account is a type of savings account offered by banks and credit unions. It’s designed to
 provide a higher interest rate compared to regular savings accounts while still offering easy
access to funds.

The Equities (Stocks) asset class: Equities, also known as stocks or shares represent ownership in a
company. Investing in equities means becoming a shareholder. A few characteristics of equities are:

- Ownership
- Dividends
- Capital appreciation: due to the increase in stock value
- Risk and return: Generally equities offer potential for higher returns compared to other asset
classes. However, they are also higher-risk due to factors such as market volatility, economic
conditions, and company performance.
- Liquidity: They are traded in stock exchanges, making them liquid.
- Market Price Determination: The price of equities is determined by supply and demand in the
market. Factors such as company earnings, industry trends, and macroeconomic conditions can
influence stock prices.

Common product within the equity asset class:

- Individual stocks
- Exchange-Traded Funds (ETFs): An ETF is a basket of securities that trades on an exchange just
like a stock does. ETF share prices fluctuate all day as the ETF is bought and sold; this is different
from mutual funds; which only trade once a day after the market closes. ETFs can contain all
types of investments, including stocks, commodities, or bonds; some offer U.S.-only holdings,
others are international. ETFs offer low expense ratios and fewer broker commissions than
buying the stocks individually. Examples: SPDR S&P 500 ETF Trust (SPY), and Invesco QQQ Trust
(QQQ).
- Index funds: Are mutual funds that aim to mimic the performance of a specific market index,
like the S&P 500. They manage to replicate the index’s returns by investing in the same stocks in
the same proportions as the index.
- Mutual funds: Pool money from multiple investors to invest in a diversified portfolio of stocks.
Fund managers make investment decisions on behalf of the investors. These funds may be
actively managed (with managers making regular decisions) or passively (tracking an index).
- Sector funds: Sector funds focus on specific industries or sectors of the economy, such as
technology, healthcare, or energy. Investors interested in a particular sector can use these funds
to target exposure to that industry.
- Growth Funds: Growth funds invest in companies with strong growth potential, often
characterized by high earnings growth and revenue expansion. These funds target capital
appreciation over time.
- Dividend Growth Funds: These funds invest in companies with a history of consistent dividend
payments and potential for growth. They are favoured by investors seeking regular income
along with potential capital appreciation.
- Value Funds: Value funds focus on stocks that are considered undervalued based on
fundamental analysis. These funds seek to capitalize on opportunities where market prices may
not reflect a company's intrinsic value.
- Small-Cap, Mid-Cap, and Large-Cap Funds: These funds focus on companies of different sizes
based on market capitalization. Small-cap funds invest in smaller companies, mid-cap funds in
mid-sized companies, and large-cap funds in larger, more established companies.
 - International and Global Funds: These funds provide exposure to equities in foreign markets.
International funds focus on stocks outside the investor's home country, while global funds
include both domestic and international holdings.
- Emerging Markets Funds: These funds invest in equities from countries with developing
economies, offering exposure to potentially higher growth but also higher volatility.
- Sector-Specific ETFs: Similar to sector-specific funds, these ETFs provide targeted exposure to
specific industries or sectors of the economy.
- Thematic ETFs: Thematic ETFs focus on specific themes or trends, such as clean energy, artificial
intelligence, or cybersecurity.
- Smart Beta ETFs: These ETFs use alternative indexing strategies to provide exposure to specific
factors like value, quality, momentum, or low volatility.

**While ETFs are traded on exchanges just like normal stocks, index and mutual funds are traded
directly through the fund company. They can be traded throughout the day, while the other two can be
traded at the end of the day at the net asset value (NAV) price.

** Index funds are passive funds. Mutual funds are passive or active.

** Passive funds replicates the performance of a specific index, with minimal active decision making by
fund managers, thus with lower fees. Whereas an active fund is managed by professionals who actively
buy and sell securities based on their own research and analysis. They aim to generate higher returns
than the market index, thus they have higher fees.

** ETFs are primarily traded by investors themselves on stock exchanges. Fund managers create the ETF
shares and offer them to the market. Once the ETF shares are available for trading, investors can buy or
sell these shares on stock exchanges through brokerage accounts, just like they would with individual
stocks. The process typically involves investors placing orders through their brokerage accounts to buy
or sell ETF shares at prevailing market prices. The transactions occur between investors, and the ETF's
price is determined by supply and demand in the market.