Analyzing and Managing Risky Investments

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Ten Things to Consider Before You Make Investing Decisions

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Risk Lover Risk lover is a person who is willing to take more risks while investing in order to earn higher returns. Description: When an entity makes an investment decision, it exposes itself to a number of financial risks.

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The quantum of such risks depends on the type of financial instrument. These financial risks might be in the form of high inflation, volatility in capital markets, recession, bankruptcy, etc.

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So, in order to minimize and control the exposure of investment to such risks, fund managers and investors practice risk management. Not giving due importance to risk management while making investment decisions might wreak havoc on investment in times of financial turmoil in an economy. Different levels of risk come attached with different categories of asset classes. For example, a fixed deposit is considered a less risky investment.

On the other hand, investment in equity is considered a risky venture. While practicing risk management, equity investors and fund managers tend to diversify their portfolio so as to minimize the exposure to risk. Related Definitions. Popular Categories Markets Live! Follow us on. Download et app. Become a member. Mail this Definition. My Saved Definitions Sign in Sign up.

How Risky Is The Stock Market?

Find this comment offensive? One protection against risk is time, and that's what young people have. On any day the stock market can go up or down.

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Sometimes it goes down for months or years. But over the years, investors who've adopted a "buy and hold" approach to investing tend to come out ahead of those who try to time the market.

Breadcrumb Home Additional Resources. What is compound interest? Credit management How to save and invest Risk and return What is diversification? Risk and return.

Savings Products Savings accounts, insured money market accounts, and CDs are viewed as very safe because they are federally insured. Investment Products Stocks, bonds, and mutual funds are the most common investment products. Suggested student activities Now that students understand the concept of risk, how would they invest their money and why. If students already have selected a stock that they are following, have them chart how the stock has performed for the past two years, five years and 20 years. We can define human capital as the present value of future income derived from labor.

How should human capital impact investment decisions? The first point to consider is that, when we are young, human capital is at its highest point. As we age and accumulate financial assets, and our time remaining in the labor force decreases, the amount of human capital relative to financial assets shrinks.

Risk management

This shift over time should be considered in terms of the asset allocation decision. The second point is that we need to not only consider the magnitude of our human capital but also its volatility. Some people such as tenured professors, doctors and government employees have stable jobs, and thus their labor income is almost like an inflation-indexed annuity. In other words, it acts very much like a bond. Other people such as commissioned salespeople and construction workers have labor income that is more volatile, and thus acts more like equities.

Financial advice should incorporate these differences. For example, for people with safer labor income, it might be appropriate to invest more aggressively—with a higher allocation to equities overall and perhaps higher allocations to riskier small and value stocks. Those with riskier labor income should consider holding less aggressive portfolios those with higher bond allocations. If the riskiness of the human capital increases, one should consider reducing the riskiness of the other assets in the portfolio, and vice versa.

A related issue is the significance of human capital as a percentage of total assets. If human capital is a small percentage of the total portfolio because there are large financial assets , the volatility of the human capital and its correlation to financial assets becomes less of an issue. Individuals should avoid investing in assets that have a high correlation with their human capital.