Question

Assess how investment risks
can be mitigated.

Answer 1

There are many ways to mitigate investment risks. To discuss the ways, we need to understand the type of risks investments have. Broadly, we can classify investment risks as- Systematic and Unsystematic risks. Unsystematic risks are the risks associated uniquely with a single stock, whereas the systematic risk is associated on a broad level with the market. Hence, in order to remove the unsystematic risks we can do diversification. Holding diverse kinds of stocks (from different industries, economies, capitalization brackets, etc), holding different asset classes like bonds, gold, commodities, Treasuries, etc are some of the ways in which one can do diversification of the portfolio.

Another popular measure used to limit investment risks is hedging. Hedging is a method in which we take an opposite position in the same or related entity either for a different maturity or in instruments such as derivatives. The motive of hedging is that even if the price goes against us, the loss made in one instrument will be compensated by the profit in another. Hence, the risks we face are contained in our portfolio.