This assignment is concerned with your understanding of the key issues relative to portfolio analysis and investment. In completing this assingment you are to limit your scope to the US stock markets only. Write a 2-page essay which you will use with new clients of your financial planning business which addresses the following issues and/or practices:
- How individual investors make investment decisions in practice rather than in theory; and
- How investors manage their funds/savings/investments in light of current stock markets.
In your response, build upon extant portfolio theory and make sure to talk about different types of risks that investors might face and how they go about managing such risks. This means you need to consider topics such as efficient frontier and optimal portfolios; as well their relevance to investment theory. Furthermore, given the nature of the assignment, avoid bringing the brokeage industry into your discussion. In other words, assume you can invest directly in the stock market and do not need any financial intermediaries like brokerage houses.© BrainMass Inc. brainmass.com February 24, 2021, 3:06 pm ad1c9bdddf
What is risk -return trade off?
The risk-return trade-off requires that you accept more risk in exchange for the chance to earn a higher rate of return. If unwilling, you should expect to earn a lower return. Conservative investors, for example, are less willing to lose 10% of their investments in exchange for the chance to earn a higher rate of return. Aggressive investors, on the other hand, are willing to accept this risk in exchange for the chance to earn higher returns
Rate of return: An investor who is unwilling to accept a higher degree of investment risk in exchange for a chance to earn a higher rate of return. Investment risk is the volatility of investment returns. A basic investing principle states that a higher degree of investment risk is required to earn a potential higher rate of return
What are different types of risk?
Major types of risk include:
Investment risk. Investment risk is the chance that your investment value will fall. Standard deviation is commonly used to measure investment risk. It shows a stock or bond's volatility, or the tendency of its price to move up and down from its average. As standard deviation increases, so does investment risk.
Market risk. Market risk is the chance that the entire market where your investment trades will fall in value. Market risk cannot be diversified. ll securities are exposed to market risk including recessions, wars, structural changes in the economy, tax law changes, even ...
This explains the concept of efficient frontier, portfolio theory and investments