Portfolio Analysis and Investment Management - Essay Example

First we must as an individual investor consider the timeframe of the investment, the level of acceptable risk that an individual is willing to undertake and how this will translate to building their ideal investment portfolio. One must become familiar with the intricacies of each financial instrument in order to determine the best way to implement this type of investment in a well diversified portfolio and their individual risk profile. Afterwards we can estimate what the overall effect of this financial instrument will be in the overall risk level of the whole portfolio and how it can suit a particular kind of potential investor.

Financial instruments are divided in different classes depending on their financial characteristics, risk levels, and maturity. For financial investments an individual can choose to invest directly in a variety of financial instruments or indirectly through the use of investment companies such as a mutual fund. Direct Investment alternatives available to build a well diversified investment portfolio are: Non Marketable Securities- Non marketable securities consist of Savings Deposits, Certificates of Deposit, Money Market Deposit accounts and U.S. Savings Bonds.

Saving Accounts and Certificates of Deposit are two of the most popular and widely used financial instruments. They are issued by commercial banks, thrift and credit unions (Madura, 1992). These types of deposits pay a fixed interest rate and in the case of Certificates of Deposit they pay higher interest rates with longer maturity periods and are only redeemable after maturity is due. Although they don’t earn high returns, they are very popular due to their low risk and being virtually risk free up to $100,000 since they are insured by the FDIC.

Money Market Deposit accounts are issued by financial institutions and are also insured by the FDIC up to $100,000.These type of accounts pay the typical Money Market interest rate with a minimum deposit to open required. Money Market Securities These types of financial instruments include short-term, highly liquid and relatively low-risk investments that are sold by governments, financial institutions and by corporations with idle funds looking to invest. These types of transactions are typically of $100,000 and are bought by money market mutual funds, but are sometimes traded in the open market.

Their maturity period ranges from one day to typically no more than 90 days. Most of the securities in the money market are used by financial institutions and banks and large commercial customers. The Treasury bill is considered one of the safest investments by the international investor community. It is one of the most important financial securities and considered the benchmark. It has been traditionally considered a risk-free financial asset since there is no practical risk of the U.S. government defaulting on its debt.

Risk averse European investors often seek the security associated with investing in Treasury