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In finance, risk is best judged in a portfolio context. Is this true Why - Essay Example

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Portfolio Risk Assessment (Name) (Institution) (Subject) (Tutor) (Date) Individuals or companies invest their resources by purchasing various assets with hope of making gains from them when their market value goes above the purchasing price or from share of profits attained through trading activities (Engle 2009, p…
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In finance, risk is best judged in a portfolio context. Is this true Why
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Download file to see previous pages 87). This uncertainty about future value of the assets makes it dangerous for the investors to put all their resources in a single investment opportunity no matter how lucrative it may seem to be. Therefore, it is preferable to spread resources in a collection of stocks as a precaution against total loss of investment due to unpredictable loss. Investors set their investment goals of maximizing their earnings and stabilizing their income from increase in value of their assets between the time of making investment and future period when they anticipate their portfolio to mature (Enrica 2012, p.123). However, the market is full of challenges that investors cannot predict at the time they are making investment. These challenges threaten to thwart investors’ objectives if increasing the value of their assets. Therefore, investors should be cautious in order to avoid losing all of their resources. Some of the risks the investors face in the market include: Liquidity risk, a type of risk that occurs in the event that assets can neither be sold nor bought faster enough to realize the perceived profit or to avert the anticipated decline in its market value (Connor, Goldberg and Robert 2010, p. 187). This scenario may occur when there are no potential buyers for such assets in the market at the current value to enable the owner to make a gain from sale of the assets. Credit risk: this is the risk due to the fact that most of the borrowers may fail to clear their debts in time as the lender had anticipated (Engle 2009, p. 81). Borrowers are required to repay the amount borrowed and some interest within specific period. However, in most cases borrowers fail to meet their targets hence resulting to the decrease in lenders’ earnings as a result of bad debts and expenses incurred when collecting the debts. Foreign investment risk: this is the risk due to the changes in market conditions across different countries that cause the decline in value of transaction in relation to another country (Sharpe 2007, 104). For example, different currencies have different exchange value across the globe. Similarly, different countries have adopted different accounting procedures in relation to depreciation of assets, stock valuation and so on (Cochrane 2009, p. 323). Therefore, depending on the approach used in the countries involved, international investors will obtain different earning from equivalent value of resources invested. Market risk: This is the probability that the value of the asset portfolio may reduce in value as a result of various aspects affecting demand and supply of that asset (Sharpe 2007, p.111). For example, the nature of market will result to either increase or decrease in value at which the assets are traded in the market. This is whereby the increase in supply of trade commodities results in the decrease of value of those commodities while the decrease in supply followed by the increase in purchasers’ demand will result in the increase in significance for those commodities (Constantinides, Harris, & Stulz 2003, p.301). Operational risk: Different companies or businesses perform better than others though in the same industry due to a number of factors (Connor, Goldberg and Robert 2010, p. 192). For example, some personnel are more ...Download file to see next pagesRead More
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