Asset Class Specification

Question 1

What are the five criteria for specifying asset classes?

Answer 1

• Asset within a class should be relatively homogenous
• Asset class should be mutually exclusive
• Asset classes should be diversifying (low correlation)
• Economically significant
• Investable at scale

Question 2

Why does “homogeneous within class” matter for portfolio construction?

Answer 2

It makes the class measurable and stable (one set of CME inputs makes sense). If the class is too mixed, correlations/volatility/expected return become unreliable.

Question 3

“Asset classes should be mutually exclusive” means what?

Answer 3

Each investment should fit into one class only (no overlap), avoiding double-counting risk and misleading allocations.

Question 4

Give a common example of “not mutually exclusive.

Answer 4

Classifying by both region and style in overlapping ways (e.g., “US equity” and “value equity” without a clear hierarchy) can double-count the same holdings.