Types of Risks in Investments and Asset Allocation

Introduces the concepts of finance. Reviews the basic tools and their use for making financial decisions. Explains how to measure and compare risks across investment opportunities. Analyzes how the firm chooses the set of securities it will issue to raise capital from investors as well as how the firm’s capital structure is formed. Examines how the choice of capital structure affects the value of the firm. Presents valuation and integrate risk, return and the firm’s choice of capital structure.

It would be great to live in a world where investing provided guaranteed payout with little or no risk, however, we all realize that is not the way investing works. Generally, the greater the risk, the greater potential for return or worse, loss. How we perceive and respond to risk is a very personal decision and there are several factors that go into making that decision. In this paper, I will discuss the risk of stock investing. There are two types of risk involved in investing in stock. One is diversifiable risk and is completely controlled by the investor. It means that a portfolio should be filled with stocks of varying degrees of risk. The other type of risk is market risk. The

Through this year April, the USD weakened, and was the possibility that political policy of trade restriction on some countries; investors anticipated forecast that the Fed increase the interest rate from 1% to 1.25% on June. The Trust’s NAV of portfolio return is -0.9%, and the benchmark return is -1.4%. The portfolio is outperformed the benchmark on April when stock selection is the main driver. Stock selection in U.S. is helped for the positive return from the most impact performance of Balfour Beatty, Senior, Howden Joinery Group and Tyman among the top contributors. (Strategy, Fund, 2017). The rising inflation will support equities for the continued economic growth in U.S.. emerging markets debt rising since the beginning of 2017. Class F-2 shares may not reach the the prediction as result in the future period, so the share prices and returns is uncertain that investors may lose in this point, especially for the short-term investors. The EM is doing well in Asian market. EM still remains uncertain risk. A lot of the dollar-denominated debt becomes difficult to service. (Edwards, 2017). But EM local currency bonds may looks very attractive and a good choice to investors for the steeper EM yield curves and positive real rates in the condition of slowly rising interest rate in U.S. (Emerging Markets Debt, 2017). People should stay still and wait for a correction to buy stock

Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unsystematic portion of the total risk can be eliminated at little cost. On the other hand, there are systematic risks that affect all investments. This portion of the total risk of an asset cannot be lavishly

Many traders exclusively focus on dealing with penny stocks when investing the stock market because of the obvious greater volatility and profit potential behind them. With this increase profit potential, there is the increased likelihood of risk, as well, because cheap stocks can just as easily drop in value in a short span of time as they can appreciate. This is why it's essential to be able to differentiate between well performing and poorly performing stocks so that you can obviously focus on the good.

Investors always seek for a way that they can get back greatest return while enjoying minimized risk. Instead of investing in a single asset, holding a portfolio is obviously less risky. However, how to select the best portfolio among tens of thousands of assets in today’s financial market? The stringent need of investors promote the raising of modern portfolio theory. In 1952, Harry Markowitz [1] established the fundamental model of modern portfolio theory: the Markowitz model, also called the mean-variance model. This model aimed to achieve a tradeoff between the expected return and the risk of return. As shown in Figure 1, among all efficient portfolios, the efficient frontier consisted of all those with highest return at each given risk level. C_1,C_2,and C_3 were the investors indifference curves which showed that traders prefer portfolios with high return or low risk. The tangent point R of the highest indifference curve and the efficient frontier gave the optimized portfolio.

Diversification means reducing unsystematic risk by investing in various types of assets and its aims is to maximize return. Diversification is an important component to be consider of reaching long-term financial goals when most of the investors agree that even though it does not assurance against loss while minimizing the risk. There are two main types of risk in investing:

As a consequence of the expectation for earning a return, a portfolio investment is made through the portfolio of the investment of securities. However, the investment's expected risk is always significantly related to the expect return in portfolio construction. Compared to direct investment, Portfolio investment is distinct in which a sizable target companies’stake will be managed day by day.

A portfolio constitutes a collection of investment assets. Investments are divided into broad asset classes. The most important decision one must make when building a portfolio is asset allocation. The percentage of each asset class one wants to hold is more important than the individual securities within each class. One must first decide the percentage of each class to hold. Individual risk tolerance will play a large role in this decision. Many individuals equate risk with the likelihood of losing money, the higher the risk the greater the chance of losing money. Investment professionals use a broader definition of risk. They look at risk as the volatility of an asset, or how much the return stream goes up and down over a certain time period. Commodities are more volatile than Stocks. Stocks are more volatile than Bonds. Therefore, Commodities have more risk than Stocks, and Stocks have more risk than Bonds. An individual's personal risk tolerance will play a major role when deciding among asset classes. An individual willing to take on a lot of risk with the hope of a larger return will hold a larger percentage of high risk investments such as options or futures. A different individual with a lower tolerance for risk will have

The two main aspects of any investment are time and risk. The sacrifice (of consumption) takes place in the present and is certain. But the benefit is to be received in the future and tends to be uncertain. In some investment options the time element is the dominant attribute while in some other the risk element may be more dominant.

Bonds usually come in a variety of forms with each having its own individual benefits, risks and tax considerations. Normally most bonds falls into four general categories: corporate, government, government agencies and municipal (Ameriprise, 2008). Meanwhile, government bonds are issued by the U.S. treasury and backed by the full-faith and credit of the U.S. Government where they will repay a specified amount of money, along with interest.

Portfolio optimisation is a method of calculating and generating the maximum profit for the investors by allocating the initial capital into various asset classes. During the procedure, investors must consider the rate of return as well as the potential financial risks that could affect the expected value and accuracy of asset allocation decisions. Markowitz’s Modern portfolio theory builds up the foundation of solving portfolio optimisation problem nowadays using standard deviations to estimate the span of risk where investments with higher returns tend to have more risks accordingly.

As explained above, expounding your present position and your future needs for capital, including your risk tolerance, will aid you, as to how your investments should be assigned among varied asset classes.

There are two main types of investments which are real investment and financial investment. Real investment in the literal meaning is real assets investment; it is an enterprise in cash in kind such as investment in intangible assets invested in other companies. It has many characteristics like close link with the production and operation, and the payback period is long and slow realization of investment and poor mobility. The examples are land and machinery (kogan, 2004). Financial investment is an enterprise invested in financial assets or financial instrument or investment activities of economic behaviour. The targets of financial investment include bond, fund, gold, stocks, forex and futures (Chen, 1991). And compare with these two investment types, the differences, firstly, they have different investors, real investment’s is a direct investor but financial investment’s is indirect. Secondly, they have the different investment objects, object of real investment is variety of real assets, and object of financial investment is a variety of financial assets. Lastly, they have the different purposes, real investors to invest in physical assets, and financial investors to invest in financial assets (Tornell, 1990).

Investor plans for long horizon after considering the fundamental factors and assumes moderate risk. The main objectives of rational investors are maximizing returns and minimizing risk, safety of the principal, tradability and liquidity are his subsidiary objectives. Financial instruments can be categorized by form depending on whether they are cash instruments or derivative