Question

Explain how an aggressive attitude towards risk can influence the investor's investment strategy and outcome. Include example.

Please help me with this question, thanks!!

Answer 1

An aggressive investment strategy is a means of portfolio management that attempts to maximize returns by taking a relatively higher degree of risk. An aggressive investment strategy emphasizes capital appreciation as a primary investment objective, rather than income or safety of principal. Such a strategy would therefore have an asset allocation with a substantial weighting in stocks and a much smaller allocation to fixed income and cash. Aggressive investment strategies are especially suitable for young adults, because a lengthy investment horizon enables them to ride out market fluctuations. Regardless of the investor’s age, however, a high tolerance for risk is an absolute prerequisite for an aggressive investment strategy.

The aggressiveness of an investment strategy depends on the relative weight of high-reward, high-risk asset classes, such as equities and commodities, within the portfolio. For example, Portfolio A which has an asset allocation of 75% equities, 15% fixed income, and 10% commodities would be considered quite aggressive, since 85% of the portfolio is weighted to equities and commodities. However, it would still be less aggressive than Portfolio B, which has an asset allocation of 85% equities and 15% commodities. Even within the equity component of an aggressive portfolio, the composition of stocks can have a significant bearing on its risk profile. For instance, if the equity component only consists of blue-chip stocks, it would be considered less risky than if the portfolio only held small-capitalization stocks. If this is the case in the earlier example, Portfolio B could arguably be considered less aggressive than Portfolio A, even though it has 100% of its weight in aggressive assets.