Question

Rational investors always attempt to minimize their risks. Do you agree or disagree? Explain.  (500 words)

Answer 1

Rational Investors always take calculated risks. Before taking any investment decision they analyze all the available option by comparing risk return from each investment.

They believe in value investing which means they try to invest where cost is less than its value.

They minimize their risks by following these:

1. Proper study of their investment opportunity - Before investing they analyze all the investments considering tax benefits, return, risk, lock-in periods, volatility, etc. Making an informed decision saves them from huge risk.

2. Adopting value investing - They investment in opportunities where present value is always greater than the investment amount.

3. They have a well diversified portfolio - It is a good saying that do not keep all your eggs in one basket. Rational investors do not invest all their money in single place. They invest in bonds, shares/stocks, time deposits, gold, mutual funds,etc. A bad decision in one investment will not wipe out their investment.

4. Track their investments - Rational investors track their investments and ensure that they are getting good returns and capital appreciation. If any investment is not performing well then they shift their money to other alternatives.

5. No speculation - Investors do not speculate stock market for short term gains. They believe in solid research before investing.

6. Knowing risk appetite - They know their risk appetite and hence they try to take risk well within their risk appetite. Taking risk knowing their limits will never make them go bankrupt.

Above mentioned are some points which help rational investors in minimizing their risk.