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

in the capital as well as money market in different countries. The whole process is done by the finance manager of the concerned investing companies. The need for the investment market globally generated from the very advent of the securities market and the developments in the line of market participation in the stock exchanges and hence market volumes. These had a cumulative impact on the volatility in the securities market which ultimately gave rise to the need of the technical analysis tool in the hands of the experts to crack the investment market movements (Correia, 2007, p.154). The need for the understanding of the market trends came primary to the fundamental analysis of the companies and this gave rise to the need for qualified and expert personnel to act as investment bankers in the hands of large asset management companies and investment banking sector.

Here this study is based on different types of tools and techniques of investment management like risk and return, CAPM model, WACC Model, capital structure, option etc. Risk and Return The terminology “risk” is mainly used for the investment which indicates the difference between the actual return and the expected return of the investment (Kieso, 2010, p.97). On the other side, return on the investment indicates the earring from investment which can be treated as a reward of risk bearing.

So, this tool indicates the gain and loss on the investment from the investment within certain time period. Portfolio Theory The fundamental of the portfolio theory indicates to diversify different types of securities in to different types of risk for the purpose to minimise the risk factor. In 1952, Harry Markowitz introduced the idea of diversification. So this theorem was mainly introduced for the purpose of maximising the return i.e. wealth of the investors. International diversification indicates diversification of the various investment strategies decided on, by the finance managers of the investment company.

It relates to the investment decision made by the finance manager in different securities of different markets, thereby, enabling the investment bank to reap the benefits of investing in different markets. Since, the foreign exchange market operates 24 hours in a day, investing in different markets will ensure maximum returns to the portfolio by taking the advantage of the variance in the currency value in different markets. Currency trading is an important strategy that most of the finance manager adopts for maximizing the portfolio value.

Diversification in the portfolio will help in eliminating risk to a great extent, since policies adopted in a country might affect the stock market of a country but might not affect the stock market of another country. Capital Asset Pricing Model (CAPM) Capital asset pricing model is an important technique to know the actual position of the particular assets (securities, bonds, share etc.). International capital asset pricing model is the extended vision of CAPM, used when the investment companies are going to invest internationally.

The extract of this model employed to stand the statement “For reducing the risk the investors should invest in the internationally diverse portfolio”. For example mutual fund can be used as a good diverse portfolio for the investors, who have less capability. The great economist William Sharpe developed the CAPM model for the first time. The key feature of this model is to calculate the risk attached with the investment and highlights