Lesson 2: Markets, Asset Classes & ESG

IMAG — Investment Management Game

Learning Outcomes

By the end of this lesson you will be able to:

Classify the main asset classes available in IMAG and explain their risk-return characteristics
Describe how macro drivers influence asset prices across the cycle
Integrate ESG criteria into asset class analysis
Map the investable universe to the Cesim Invest platform

Teaching chapters: Markets & Asset Classes · Sustainable Investing

Asset Classes & Instruments

The Investable Universe

Four broad asset classes: Equities · Fixed Income · Alternatives · Cash
Each has a distinct risk-return profile, liquidity, and ESG footprint
The IMAG universe is a subset of the global investable universe

→ Content: table of asset classes with expected return, volatility, and correlation.

Equities

Represent ownership in firms; residual claim on cash flows
Priced by: earnings growth, discount rate, sentiment
Key dimensions: geography, sector, size, style (value vs. growth)
ESG dimension: governance quality, climate exposure

→ Content: equity risk premium history; sector heatmap.

Fixed Income

Government bonds: risk-free benchmark; duration & yield curve risk
Corporate bonds: credit spread as compensation for default risk
Yield curve dynamics: steepening, flattening, inversion
Cash & money market: liquidity reserve; real rate exposure

→ Content: yield curve diagram; credit spread history.

Alternative Assets & Digital Assets

Commodities: inflation hedge; supply-demand dynamics
Real estate: income + capital appreciation; illiquidity premium
Digital assets: high volatility; low correlation (historically)
Role in a diversified portfolio: diversification benefit vs. complexity cost

→ Content: correlation matrix across asset classes.

Currencies & FX Risk

Multi-currency portfolio: returns affected by exchange rate moves
Hedging choices: full hedge, partial hedge, unhedged
Currency as an active return source vs. unintended risk

→ Content: FX impact illustration on a cross-border equity position.

Macro Drivers of Asset Prices

The Macro Framework

Four macro regimes: Expansion · Slowdown · Recession · Recovery
Each regime has characteristic asset class returns
Regime identification: leading indicators, yield curve, PMI, credit spreads

→ Content: regime wheel diagram; asset class returns by regime table.

Key Risk Premia

Premium	Driver	Asset class
Equity risk premium	Growth, earnings	Equities
Term premium	Duration risk	Long bonds
Credit spread	Default risk	Corp. bonds
Inflation premium	Real rate uncertainty	TIPS, commodities
Illiquidity premium	Lock-up cost	Alternatives

→ Content: historical estimates for each premium.

Valuation Signals

Equities: P/E, CAPE, earnings yield vs. bond yield (Fed model)
Bonds: real yield, breakeven inflation
Credit: option-adjusted spread vs. historical average
Valuation is a poor short-term timer but a strong long-run anchor

→ Content: current valuation dashboard from Cesim Economic Outlook screen.

ESG & Sustainable Investing

The ESG Framework

Environmental: climate risk, carbon footprint, resource use
Social: labour standards, supply chain, community impact
Governance: board structure, executive pay, shareholder rights

→ Content: ESG rating methodology overview; data providers.

Integration Approaches

Approach	Description
Exclusion	Remove sectors/companies (tobacco, weapons, etc.)
ESG integration	Adjust return/risk estimates for ESG factors
Best-in-class	Select top ESG scorers within each sector
Impact investing	Target measurable positive outcomes
Engagement	Active ownership to improve practices

ESG in the IMAG Simulation

ESG score is a graded KPI — it affects your final result
Data available in Cesim: per-asset ESG ratings
Trade-off: higher ESG score may constrain return maximisation
You must justify your ESG approach in the IPS (Lesson 3)

→ Content: screenshot of ESG data in Cesim; worked example of ESG-adjusted allocation.

Key Takeaways

Asset class choice drives the bulk of long-run portfolio returns
Macro regime awareness improves timing and risk management
ESG is not just a constraint — it is a source of risk-adjusted alpha

Simulation Task — Lesson 2

Before next lesson

In Cesim, open the Markets screen and record the available assets
Identify each asset’s asset class, geography, and ESG rating
Form a preliminary view on the current macro regime (use Economic Outlook)
Read: Markets & Asset Classes and Sustainable Investing chapters