Managing Investment Growth In order to effectively grow an investment, it is important to analyze risk and diversify securities, to maximize a portfolio to match the goals of the investor. Through analyzing the different classes of risk, one can match investments to an investors risk tolerance and return requirements. While some investments may present greater risk they are countered by a higher rate of return and vice versa, less risk corresponds to a lower return. Moreover, investment risk can be substantially reduced through diversification, which spreads a portfolio across different industries, businesses and investment options. The makeup of a diversified portfolio continuously changes based on an investors time horizon and investment
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Inflation Risk (Purchasing Power Risk) The ability to purchase goods or services is dependent on the value of assets and whether or not the inflation has increased or decreased the value of the country’s currency.
2. Interest Rate Risk Depending on the Federal Reserve and monetary policies affect the interest rate could increase or decrease the value of bonds and stocks. For example the value of bonds and interest rates are inversely related.
3. Market Risk (Systematic Risk) The unexpected changes in the entire market, since they affect the market as whole they cannot be diversified away.
4. Business Risk (Unsystematic Risk) Measures a firm’s ability to live up to expectations by determining if they are able to meet their operating and financial costs.
5. Liquidity Risk The ability to convert an asset into cash. The more liquidity an asset has the faster one can sell or buy it.
6. Reinvestment Risk Determines the risk of future investment decisions as to whether future proceeds should be reinvested or redeemed.
7. Political Risk The volatility of foreign climates and how those changes can affect the value of …show more content…
Accordingly, if an individual is in the accumulation life cycle phase they have a longer time horizon and can diversify their assets in riskier securities which will provide a greater return, increasing the investors wealth over the years. However, when an individual is in the preservation state they have a short time horizon and cannot afford to be invested in riskier securities. Therefore, investors in the preservation phase choose investments with high liquidity that have low risk and return (Hirt, et al., 2006). As with any investment, it is important to adhere the portfolio to the clients risk aversion preferences and investment
Inflation Risk (Purchasing Power Risk) The ability to purchase goods or services is dependent on the value of assets and whether or not the inflation has increased or decreased the value of the country’s currency.
2. Interest Rate Risk Depending on the Federal Reserve and monetary policies affect the interest rate could increase or decrease the value of bonds and stocks. For example the value of bonds and interest rates are inversely related.
3. Market Risk (Systematic Risk) The unexpected changes in the entire market, since they affect the market as whole they cannot be diversified away.
4. Business Risk (Unsystematic Risk) Measures a firm’s ability to live up to expectations by determining if they are able to meet their operating and financial costs.
5. Liquidity Risk The ability to convert an asset into cash. The more liquidity an asset has the faster one can sell or buy it.
6. Reinvestment Risk Determines the risk of future investment decisions as to whether future proceeds should be reinvested or redeemed.
7. Political Risk The volatility of foreign climates and how those changes can affect the value of …show more content…
Accordingly, if an individual is in the accumulation life cycle phase they have a longer time horizon and can diversify their assets in riskier securities which will provide a greater return, increasing the investors wealth over the years. However, when an individual is in the preservation state they have a short time horizon and cannot afford to be invested in riskier securities. Therefore, investors in the preservation phase choose investments with high liquidity that have low risk and return (Hirt, et al., 2006). As with any investment, it is important to adhere the portfolio to the clients risk aversion preferences and investment