According to Greer, what defines an asset class?

An asset class is defined by a set of assets that possess underlying economic characteristics that are fundamentally similar. This means that the assets within the same class are likely to respond similarly to market forces, have comparable return profiles, and share similar risk characteristics. For example, equities, fixed income, and real estate are distinct asset classes because they generate returns from different sources and have different reactions to economic changes.

This understanding distinguishes asset classes from simply similar characteristics or external metrics, such as volatility or diversification. Characteristics like market volatility indicate how assets react to price changes but do not inherently group assets into a class. Similarly, a collection of diversified investments may encompass multiple asset classes rather than define a singular one. Therefore, the correct answer leverages the concept that economic similarities form the foundation for classifying assets into distinct groups, which is crucial for asset allocation and risk management strategies.