Question

Demonstrate how would you associate investing in a single asset with an initial capital of

$1,000 with justifications taking into considerations major challenges and uncertainties in

domestic and global market.

Answer 1

Given the challenges and uncertainties in the domestic and global market I will associate investing in a single asset as a highly risky proposition. This is because investing in a single asset will deprive me the benefit of diversification.

One of the fundamental aspects of investing is that reduction in risk due to diversification. By investing the initial capital amount of $1,000 in more than one asset category I will be able to reduce my risk exposure of losing money. Moreover my portfolio’s overall investment returns will have a smoother ride. By having my investments parked in more than one asset category I will be able to balance the fall in returns of one investment category with better returns that will accrue from another category. For example in the present uncertain economic environment equities have fallen in all markets. Thus if I would have invested only in equities my investment basket of $1,000 would have fallen. On the other hand gold as an investment class has seen an increase in value. So if I had divided my investments into equities and gold then my overall portfolio would have been insulated in a manner from fall in equities.