Finance risk in a portfolio context - Admission/Application Essay Example

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Finance risk in a portfolio context

In order to determine the theoretical rate of return that is appropriate for an investment, Capital Asset Pricing Model (CAPM) is used (Brealey, Myers & Allen, 2011). Assets that are evaluated using this model can be included in an existing diversified portfolio if their non- diversifiable risk is known. In doing the calculation, the sensitivity of the investment to systematic risk is taken into consideration. This risk is represented by the symbol β. The projected market return and the projected theoretical return of the risk free investment are also determined.  The formula for CAPM used to determine the expected rate of return is as follows; The measure of systematic risk used in CAPM is important since the investors can compare it with that of other investments in the market. They can therefore go ahead and select the best investment. In addition, they are able to improve their portfolio and reduce the chances of risk. Managers can also use the model to determine the required rate of returns for investment (Chandra, 2008).Long Term FinancingIn a business, there are those investments whose returns are expected for a long period of time usually over one year. These are usually investments in long term assets such as machinery and buildings. The money needed to finance these investments should be available for a long time (Brealey, Myers & Allen, 2011). The time required to pay back the finance should exceed one year. A company should have a good mix of long term financing (capital structure).  This will help reduce the cost of capital as well as the risk involved. The investor should have a good business plan so as to make a good investment portfolio that reduces risks. The company will get a long term debt depending on the collateral available. The manager should be able to select between the short term and the long term financing. To do this, they should consider the risk-return trade off. It is important to note that long time financing is less risky as compared to the short term financing. ...
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Summary

In the paper “Finance risk in a portfolio context” the author analyzes the term portfolio which can be defined as a collection of investments that are held by an individual or by a company. To correctly judge the risk in a certain area it is important to judge from a portfolio.


 

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