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

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

The giant players of this sector, the business are generated by management of the funds of the High Net-worth Individuals [HNI] clients and the big Corporate Houses. The services are obviously for a pre-determined fee which is generally structured on the basis of the returns generated by the investment bankers. In most common cases, there is a fixed portion of fee as well irrespective of the return generated by the fund managers (View, 2007 p.144). In this essay the researcher will analysis different aspects of portfolio. The theoretical background of portfolio especially risks and return is the integral part of portfolio discussion. So, here the researcher discusses this part at the first part of the essay. After that the researcher will discusses different aspects related with the portfolio i.e. CAPM Model, Long term financing, capital structure, WACC model, dividend policy and option. After discussing these aspects the researcher will summarise the whole topic and find out risk is the best judge in the portfolio context or not. Risk and Return In the terms of Investment, risk is the probability of difference between the expected returns and the actual return of investment. Since, the risk indicates the possibilities of reducing the part of initial or original investment or all amount of original investment. The risk is calculated through the standard deviation of the average or historical return of the particular investment. Presently, the market is too much volatile. So, most of the Companies are spending a large portion of time and money to develop the risk management strategies for the purpose of manages the risks attached with the business operation. On the other side, the return is the reward of taking the risk in investment. So, return indicates the loss or gain in the securities with in a particular timeframe. Portfolio Theory This is mathematical formulation which derived from the diversification concept. According to this theorem more than one investing assets are selected to minimise the risk of the each assets. There are two primary aspects of portfolio theory i.e. tries to minimise the portfolio risk at a certain level of expected return or to attempt to maximise the expected return of the investor at certain level of portfolio risk. Harry Markowitz was the person who introduced the idea of diversification in the year 1952. The concept of equity diversification in the international market is aimed at reducing risk, thereby maximizing the value of the portfolio. In the current market scenario, there are two views in the market that are quite competitive in nature. One of the views accept that diversification in the international equity markets have the capacity of eliminating the factor of risk involved in an investment, whereas the second view accepts that if the disturbances in an economy is specific to a country, then the diversification benefits can be achieved as a result of correlation between the markets remaining at a lower level. But in case the correlation existing between the marke ...Show more

Summary

“In finance, risk is best judged in a portfolio context" Is this true? Why? Table of Contents Introduction 3 Risk and Return 3 Portfolio Theory 4 The CAPM (Capital Asset Prising Model) 5 Dividend Policy 5 Long Term Financing 6 Capital Structure (Irrelevance) 6 Capital Structure (and Market Perfection) 7 The weighted average cost of capital (W.A.C.C.)  7 Option (Financial) 7 Option (Real) 7 Risk in Portfolio Context 8 References 10 Introduction The investment market is inextricably linked to the securities market of the country; and the understanding of the stock markets is a must for the successful management of the portfolios…
Author : bernhardrubye
In finance, risk is best judged in a portfolio context. Is this true Why essay example
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