FINANCIAL ANALYSIS

International Financial Markets and Institutions



International Financial Markets and Institutions

(a)

Portfolio Management is the art of allocating funds to various asset classes in expectation of getting maximum return with minimum amount of risk. It is the responsibility of Investment Advisor to assess the risk appetite of the investor and allocate resources accordingly. The investment advisor must assess the objectives and needs of the investor before making a final decision about the investment. Portfolio consists of many assets including low to high risk securities like Government Securities, Bonds, Stocks, Mutual funds etc. In this paper, we will analyze the areas in which an investor could effectively use GBP 500,000. This analysis would include assessment of various asset classes that would help the investor understand various options.

The investor has saved an amount of $100,000 and he wants to make an investment in different securities to earn a decent return at minimum level of risk. Before making any investment decision, as an investment advisor, it is mandatory to understand the risk attitude of the customer. If the investment advisor fails to understand the risk attitude of the customer and take decisions that does not reflect the risk attitude of the customer, the investor may find himself in trouble (Tuller, 1994, pp. 94-96).

If the investor is risk averse, investment in low risk securities must be made. Low Risk securities are associated with low return as there is a direct relationship between risk and return. It is important to make such a decision, because the chances of loss in such securities are very low. On the other hand, high risk securities may offer greater returns, but could also make the investor lose all his money.

The risk attitude of an investor depends upon many factors such as age, income, savings, marital status etc. Hence, the most important factor for an investment advisor is to assess the risk of an attitude of an investor and then develop a portfolio that best suits the investor. Stocks, Real investment securities are very risky securities, which offer great returns, but the risk of losing the money is also very high. On the other hand, government securities and bonds have low risks, because they offer fixed return and are backed by either government or big corporation. We will discuss all the available asset classes in detail in the following section.

After assessing the risk attitude of the investor, it is also very important to determine the needs of the investor before making any decision. The investment advisor must analyze the purpose and use of the invested money. Sometimes an investor invests money in order to get a regular income for any need or requirement, while other investors may require the investment in order to grow their capital and get capital gains from their investment in order to aim bigger things. There are individual who may also want capital gain plus regular interval. Financial Markets are so developed that it caters to all the needs and requirements of ...