Risk and Portfolio Context Essay Example | Topics and Well Written Essays - 1500 words

insecurity and Portfolio Context - Essay standardRisk is a core element of investment and is inseparable from investment function. According to investment theories and real(a) practices, it is evident that there is no opening move of return over the investment without the assumption of luck in that investment by the investor. A conscious and willing assumption of risk by a learned investor, expecting to earn a measure of return, lies at the heart of investment process (Sedleck, 2008, pp.1). Webster defines risk as the possibility of loss or injury (Sedleck, 2008, pp.3), in investment risk is the possibility of monetary loss finished the loss in value of the investment instrument. Risk is a subjective measure with many attainable definitions. This is because different investors adopt different investment st yardgies to attain their investment objective. Therefore, the subjectivity of the risk is its only main(prenominal) characteristic. It is an unavoidable function of inves tment, intelligent investment strategies provoke help to reduce it but nothing can help to ignore, negate or make risk zero (Sedleck, 2008, pp.3). Types of Investment RiskInvestment risks are of two types systematic and unsystematic, however, they hole various other kind of risk in these two contribute branches of risk. The risks associated with investments are as follows Systematic Risk It is the food market risk, related to the factors the complete market economy or securities market. This kind of risk is beyond the control of the investor. As it is a market risk, it rivals all the companies in the market irrespective of the company financial position, capital structure and management position. It involves domestic and international factors, depending upon the kind of investment (FINRA, 2013). Types of Systematic Risks Interest rate risk is the risk that due to change in interest rate over time will result in value of security going down (FINRA, 2013). pretension Risk is the risk of decrease in purchasing power due to increase in prices of goods and function and cost of living (FINRA, 2013). Currency Risk arises due to world currency floating against each other. The ground for this risk is the change in exchange rate. Change in exchange rate can affect the return on a foreign currency investment in positive as hale as negative way. This risk occurs only in circumstances of investment in international securities and cash in hand (FINRA, 2013). Liquidity Risk is the risk that an investor might not be able to purchase and sale investments promptly at the price that is close to the actual underlying value of that investment. It is higher in over the answer markets and small-capitalization stock (FINRA, 2013). In case of foreign investment the timing of dealings, market size and matter of listed companies can affect an investors ability to buy or sell foreign investment (FINRA, 2013). Socio-political Risk is the risk of adverse effect of instability a nd unrest in one or more country of the world on the investment market (FINRA, 2013). Defence against Systematic Risks An investors defence against systematic risk is the strategy of asset allocation. This strategy dictates that the investor should build an investment portfolio with such investments that react differently to same economical factors. It involves investing in bonds as well as