Investment alternatives range widely and are grouped into categories called asset classes. On one end of the spectrum are low-risk, highly liquid cash investments, with the other end characterized by either lower liquidity or aggressive risk, or both.

In the investment world, there is a general relationship between risk and return: The more return you seek, the more risk you probably have to accept. Conversely, if you seek the safest, lowest-risk investments, you’ll have to accept low relative returns.

In the simplest form, we can think of three basic asset classes: cash investments, fixed income investments, and equities (stocks). Cash investments offer low-risk yields that are often not much more than the prevailing inflation rate. On the other hand, stocks offer a chance at higher expected returns, but come with substantial risk of loss. In between are fixed income securities, such as bonds, which generally offer an investment yield that is higher than cash, but with an expected return lower than stocks.

Within the fixed income asset class there is also a risk spectrum. Bonds with shorter maturities are considered safer than those with long maturities, and those issued by the US government are considered safer than those issued by corporations. (See more about bonds immediately below, under What is a bond?) And within the universe of corporate bonds, some companies are considered to have less credit risk than others, depending on their financials, their history, their management, and many other factors. Several companies specialize in rating the debt of bond issuers, bestowing an alphabet of ratings that ranks the bonds on a scale from safe to speculative. Standard & Poor’s and Moody’s are the two most prominent of these ratings agencies.

Similarly, within equities you’ll find a range of risk. One way to measure that risk is by the historical volatility of a stock. Volatility expresses how much the price of a stock varies over a time period. Some stocks gyrate wildly, falling more than the general market in downturns, and rising more in upturns. Others show patterns of slower movement than the overall market. It’s also fair to view young, small companies as being riskier than entrenched large ones.

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Basic Investment Objectives
You might know about different asset types, but do you know how each type contributes to a particular goal?