LO1 Asset Classes, Behaviour and Correlation
Characteristics, costs, valuation, inherent risks and correlations of cash, fixed interest, equities, property and alternative investments.
How to prepare for R02
Match the annual edition to your exam date, learn product structures and risk relationships, then practise calculation, analysis and client-application decisions.
Core concepts
Concept 1
Cash and cash equivalents provide liquidity and capital stability but face inflation, credit and reinvestment risk; return and protection depend on provider, term and account conditions.
Exam cue: Identify whether a figure is price, coupon, income, running yield, redemption yield, earnings, dividend or net asset value before calculating.
Concept 2
Fixed-interest valuation links coupon, market price, maturity, issuer credit, interest rates and yield curves, while equities link ownership, profits, dividends, valuation measures and market expectations.
Exam cue: For an interest-rate change, separate its likely effect on existing fixed-rate prices from income already contracted.
Concept 3
Property and alternatives bring distinct income, valuation, liquidity, gearing and pricing risks; correlations between asset classes help explain diversification but are unstable estimates rather than guarantees.
Exam cue: Use correlation direction and strength to judge diversification, without treating the coefficient as a return multiplier.
Risk pitfalls and guardrails
Confusing coupon rate, running yield and redemption yield.
Guardrail: Do not mix asset and wrapper, nominal and real, price and yield, willingness and capacity, or benchmark return with investor experience.
Assuming a low historical correlation removes loss or liquidity risk.
Guardrail: Do not mix asset and wrapper, nominal and real, price and yield, willingness and capacity, or benchmark return with investor experience.
Comparing property or alternative valuations with daily traded assets without accounting for appraisal and pricing differences.
Guardrail: Do not mix asset and wrapper, nominal and real, price and yield, willingness and capacity, or benchmark return with investor experience.
Memory anchors
Cash Trade-Off
Liquidity and nominal stability come with inflation, provider-credit and reinvestment risks.
Bond Price and Yield
For comparable fixed cash flows, market price and yield generally move in opposite directions.
Equity Measures
EPS, P/E, dividend yield, dividend cover and NAV answer different valuation questions.
Property Frictions
Valuation delay, transaction cost, maintenance, concentration and illiquidity distinguish direct property.
Alternatives
Commodities, physical assets and private equity can add diversification but also pricing, access and liquidity complexity.
Correlation Range
Correlation runs from minus one to plus one and describes co-movement, not the size of future returns.
Checkpoint rule
Do the check-up only after you can summarize each concept in one sentence and identify one dangerous pitfall from memory.
Knowledge Check (after reading)
Short check-up to confirm understanding of this module.
Check-up Questions
A client keeps three months’ planned expenditure in an instant-access bank account. Which investment characteristic is being prioritised?
A fixed-term deposit pays a higher rate than an easy-access account. What is the most direct trade-off?
Answer all questions to submit.
Next step personalized recommendations
Continue learning
Move forward only after this module is stable.
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