Risk assessment is being identified as a critical task while performing the portfolio management that has a considerable impact on the selection process of an appropriate investment portfolio that offers excellent returns (Nicolas and May, 2017). This investigation evaluates the relationship between risk and returns regarding share prices of 10 companies. It also determines that relationship between risk and returns along with the limitation of the portfolio management approach, which can be vital for investors seeking in place to optimize their investments. For students who are grappling with complex concepts such as risk assessment and portfolio management, seeking finance dissertation help can offer the most valuable guidance in navigating through the intricacies of this particular field.
In the context of share portfolio management, risk and return both are interrelated concept and influencing each other because an individual investor could find high returns along with considerable risk in loss of investment. On the other hand, low-risk investment and portfolio also reduce the earnings of an investor. There are significant variations identified in the risk factors based on the nature of the investment. 1. Direct Relationship between Risk and Return (A) High Risk - High Return: This type of relationship occurs in such conditions if the investor will take more risk for availing higher returns. For example, an individual has invested one million that indicates the risk of loss of one million dollars. Suppose, an individual has earned 10% return then he could enhance its risk factor by investing more funds in assessing better earning capabilities (Paquin, Gauthie and Morin, 2016). (B) Low Risk - Low Return: In the context of a direct relationship, another condition occurs when an investor decreases investment that shows a reduction in the risk of loss and his return will also decrease during the period of reduction in investment. 2. Negative Relationship between Risk and Return (A) High-Risk Low Return: Sometimes, an investor is increasing the investment amount for assessing higher return, but with an increased return, some investors have found low returns as a result of the distinct nature of the investment project. Therefore, there is no benefit for increasing the volume of investment within low return projects (Pompian, 2016).
For example, There are 1,00,000 lotteries available in the market through which an individual will earn the prize. If an individual has bought 50% of total lotteries or 75% of lotteries, then the value of earning will reduce because increase in the risk. (B) Low-Risk High Return: There are some projects in which if an individual invest low amount but that particular individual would be able to earn a higher return. For example, Investment in government projects. If an individual gets government based investment options, then he will get a higher return by taking the small risk of loss (Ampatzoglou and et al., 2015). Role of diversification for reduces risk in the context of share portfolios In the context of portfolio management, the approach of diversification plays a critical role in lowering the risk factor. The primary principle of investment is managing the investment within the diversified portfolio. This approach assures the investor in which investor can spread his capital amongst different investments that could avoid the reliant upon a single investment for different goals of return (Chandra, 2017). The critical benefit of diversification is that it assists investors in reducing the risk factor within the investment portfolio.
Three key advantages of diversification include:
The volatility of the tangency portfolio is identified as a unique approach for assessment of the level of variance analysis within returns of a portfolio. The approach is focused on determining the average earning and risk factors that could influence the earning capabilities of the portfolio. On the other hand, Value At Risk of a portfolio is calculated not only by measuring or estimating return and volatility of individual assets but also assessing correlations between them (Wu, Wermers and Zechner, 2016). With the growing number and diversity of positions that have been identified in the existing portfolio, there are some increments identified within the level of difficulties. Therefore, it can be stated that the approach of Volatility of the tangency is not suitable for calculating the Value at Risk of the same portfolio when there are changes that occurred during the period. In addition to that, it does not consider market forces and situational changes for determining the value of the portfolio.
As per the above assessment, it is concluded that the assessment of financial risk is a very critical task in portfolio management because it requires consideration several factors such as market risk, growth factors and others. CAPM tool provides significant assistance for evaluating the reliability of share portfolio, but dependence on assumption has limited the effectiveness of the CAPM model. This report has concluded that diversification of portfolio supports to an investor for lowering the risk of loss within the total investment.
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