Question

In your opinion, what are the top three most critical issues involving financial management given our current economic environment? Please provide detailed support and the reasons for your selections. Please use specific examples to support your response. Be sure to cite your source(s).

Answer 1

There are several critical issues involving financial management in current economic environment. Below are 3 reasons:

Economic Cycle: Economic cycle goes through recession and boom phases. It has both peak and trough at the end of each phase. No matter how good is your investment portfolio is if the economy is going through recession phase, probability of having a negative return is maximum. You can reduce your negative return by diversifying and by selecting defensive securities. Hence, one needs to understand the economic cycle very clearly in order to successfully manage your portfolio.

Sovereign Risk: Each country has an inherent risk of investment. Your investment can give you negative negative return if you choose a very good security in a poor graded country. E.g. BVC is the most diversified security in Venezuela stock exchange. However, their economy's hyperinflation and poor growth rate and debt caused the BVC to give huge negative return for last couple of years. Hence, you need to understand the country risk or sovereign risk in order to invest in a country.

FII Investment: FII (Foreign Institutional  investor) investment is very risky for a particular country. These are foreign investment into the stocks or bonds of a country. When they invest you will see huge index gain and if they withdraw you will see huge decline of index or bond selling. Hence, these investment can be very risky unlike FDI.

Hence, these are few factors which makes financial management very risky. To be successful you understand FII's mindset, analyze country risk and economic cycle along with study of the security itself. This way you can minimize risk but also it becomes challenging.