Question

PROVIDE NOTES FOR EACH TOPIC

Inflation and investments.
Security Market Analysis.
Risk and Return in portfolio Management. Analysis of risk & return, concept of total risk, factors contributing to total risk,
systematic and unsystematic risk, Risk & risk aversion.
Diversification and Techniques of Risk
Reduction.

Answer 1

Inflation and investments : Most investors aim to increase their long-term purchasing power. Inflation puts this goal at risk because investment returns must first keep up with the rate of inflation in order to increase real purchasing power. In much the same way, rising inflation erodes the value of the principal on fixed income securities.

Security Market Analysis : The security market analysis refers to the analysis of markets and securities traded there in terms of the risk-return, quantities raised or traded, price trends and other indicators of the market.

Risk and Return in portfolio Management :

Analysis of risk & return : A risk–return analysis seeks “efficient portfolios”, i.e., those which provide maximum return on average for a given level of portfolio risk. It examines investment opportunities in terms familiar to the financial practitioner: the risk and return of the investment portfolio.

concept of total risk : Systemic risk plus unsystemic risk on an investment. Every investment has systemic risk (any risk carried by an entire class of assets and/or liabilities) and unsystemic risk (any risks unique to the investment). When making investment decisions, investors must account for the total risk to the investment.

factors contributing to total risk : Investing comes with risks. Sometimes those risks are minimal, as is the case with treasury bonds, but other times, such as with stocks, options and commodities, the risk can be substantial. The more risk the investor is willing to take, the more potential for high returns. But great investors know that managing risk is more important than making a profit, and proper risk management is what leads to profitable investing.

Sytematic and unsystematic risk : Systematic risk is the probability of a loss associated with the entire market or the segment whereas Unsystematic risk is associated with a specific industry, segment or security

Risk & risk aversion : A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks. In other words, among various investments giving the same return with different level of risks, this investor always prefers the alternative with least interest.

Diversification and Techniques of Risk Reduction :

Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event.

Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk. Here, we look at why this is true and how to accomplish diversification in your portfolio.

Different Types of Risk

Investors confront two main types of risk when investing. The first is undiversifiable, which is also known as systematic or market risk. This type of risk is associated with every company. Common causes include inflation rates, exchange rates, political instability, war, and interest rates. This type of risk is not specific to a particular company or industry, and it cannot be eliminated or reduced through diversification—it is just a risk investors must accept.