Asset classes are the underlying instrument of an investment portfolio in which an investor’s capital is invested in. Asset classes can be categorised as traditional or alternative.

This is a risk management strategy that reduces overall investment risk by spreading the portfolio’s exposure between underlying assets, managers, geographies etc.

The sharpe ratio is the average return earned in excess of the risk-free rate per unit of standard deviation or risk. So if an investment returns 12% at a standard deviation of 5% and the risk-free rate was 4%, the sharpe ratio is: (12-4)/5 = 1.6

Volatility refers to fluctuations in value of an asset or portfolio. Higher fluctuations (volatility) in value are dangerous for an investor with a short-term investment horizon, because the value of the underlying asset could possibly not recover from a large drop in value in the short term. Different asset classes have different levels of volatility, therefore it’s important to allocate capital appropriately according to the invest need.