The Importance of Asset Class Definition

The most important attribute of an asset class is that it should be expected to raise the utility of a portfolio. An asset class has to be different from other asset classes, which would mean it should be externally heterogeneous. If it weren't as efficiently different than you could replicate it with combinations of other assetclasses, it would just be redundant. It should be able to either increase the return or reduce the risk of the portfolio without requiring selection skill on the part of the investor. Finally, you should need to be able to access it in a cost-effective way. Otherwise, you would be able to raise the Utility of the portfolio.

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