Milette S.
Caliwan September 22, 2019
BFN-B1P Prof.
Barba
M6: Assignment 1
1. What is investment risk?
Investment risk can be characterized as the likelihood or possibility that losses
will occur compared to the expected return on any specific investment. Simply
put, it is a measure of the degree of uncertainty in achieving the returns as per
the investor's expectations. It is the degree of unintended outcomes to be
realized. Risk is an important factor in the evaluation of an investment's
prospects. Many investors view less risk as beneficial when making an
investment. The lower the probability of an investment, the more successful the
investment is. The thumb rule, however, is that the higher the risk, the better
the return.
2. What are the risks in stock investment? Explain briefly.
All stock investments bring risk, and risk is the opportunity to lose the money
you spend. With higher potential benefit but also a higher potential loss, a risky
investment could come. Another type of risk is volatility. The more a stock price
fluctuates, the more the stock has volatility. Getting a high winning average and
a good win to lose ratio will help a trader handle downside risk when it comes to
short-term trading. One way for traders to muffle losses is through a stop-loss. A
stop-loss can help minimize risk and boost the winning average as well as the risk
to reward ratio. It can also help spread risk by diversifying short-term trading
with long-term investing. You should diversify your portfolio for long-term
investment, which will help decrease volatility. During extremely volatile periods,
you should also hold onto inventories because long-term investment requires
holding stocks for years. Investing in stock markets can be a highly rewarding
venture-if you understand how to handle the risk, you will be on your way to
achieving long-term investment success.
3. How do you lessen the risk in stock investment?
Strategy #1 Asset Allocation
Reasonable asset allocation refers to how you measure the assets in your
portfolio to try to accomplish a particular target — and this could be the single
most important factor in your portfolio 's performance.
For example, you may decide to position as much as 80% of your assets in stocks
and as little as 20% in bonds if your aim is to seek growth, and you're willing to
take on market risk to achieve that goal. Make sure you know your investment
timeline and the potential risks and rewards of each asset class before you
determine how you will split the asset classes in your portfolio.
Strategy #2 Portfolio Diversification
In order to help minimize investment risk, portfolio diversification is the method
of choosing a variety of assets within each asset class. Diversification through
asset classes will also help to lessen the effect on your portfolio from significant
market fluctuations.
If you were to invest in a single company's stock, you would take a greater risk by
relying solely on that company's success to develop your investment. This is
known as "single-security risk" — the risk that with the price of one possession,
your investment will fluctuate large in value. But if you buy stocks in 15 or 20
companies in many different sectors instead, you will lower the risk for a major
loss. If the return on one investment falls, the return on another could increase,
which could help offset the bad performer. Know, this does not reduce risk and
there is no protection against loss of investment.
Strategy #3 Dollar-cost Averaging
Dollar-cost averaging is a disciplined investment technique that can help to
smooth out the consequences of portfolio price volatility.
You add a fixed dollar sum to the purchase on a regular basis of stocks, bonds
and/or mutual funds with this strategy. As a consequence, when prices are low,
you buy more shares, and when prices are high, less shares. The average cost of
your stock would generally be lower over time than the average price of such
stock. And because it's systematic, this approach will help you stop making
emotional investment decisions.
