Finance Essay

797 Words Nov 26th, 2014 4 Pages
Assignment 1: Investment Basics
To begin, according to investopedia, risk tolerance is the degree of uncertainty that an investor can handle when a negative change takes place in the portfolio they are currently working on. With regards to risk tolerance there are a few key points that can determine the risk; age, income, and financial goals that are set by yourself or your client. In order to create a process for accessing the clients’ tolerance for investment risk is to find out about their assets, whether it is risky or risk-free, but jumping into making a portfolio. A lot of investors will look at instruments such as money markets, treasury bills, and CDs as fairly safe in terms of default credit risk, according to Bodie, Kane,
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Next there are stocks, which come with economic risks, inflation, market value risk, and being too conservative when investing (www.stockesabout.com). With the stock market this to me seems to be the riskier than any other investment, because this is based solely upon the economy. You could be up making millions and all of a sudden, something drastic could happen such as a depression and you just watch all your money leave, leaving you broke because you did not pull your money out fast enough. Then if you are too conservative and only invest in one stock, you will not see your money work for you and also make it hard to reach any financial goals you may want to be able to obtain. Lastly there are mutual funds, which are just like bonds they can change as the investment changes. They have market risk, liquidity risk, credit risk, and even country risk. With the market the investments can be declined because of risks that are not avoidable that can affect the entire market, liquidity risk is when the funds are declining because there are no buyers at the time, and depending upon the country it can decline because of political changes (www.getsmarteraboutmoney.ca). To sum it all up, it is good to have a diversified portfolio of bonds, stocks, and mutual funds depending upon the risk tolerance. If the investor has a low risk tolerance will only invest in

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