Money Management Final-1 Assignment Example | Topics and Well Written Essays - 3000 words

Money Management Final-1 - Assignment Example Investing the entire sum of money in a single stock exposes the investor to the risk of that asset. So, in case when the price of that security falls in the market due to any reason, the investor will suffer huge losses. This, risk of concentration of money in a single stock is mitigated through diversification. Risk Profile Analysis Investments are subject to market risks and a rational investor always prefers to minimize risk over given investment return of maximize return over given risk. The risk profile of a portfolio is determined on the basis of risk appetite of investor. If the investor is risk prone then such investor would prefer investing larger portion of portfolio in risky assets such as common stocks or growth EFTs where as an investor with a lower risk appetite would prefer investing in safer assets to ensure protection of principal investment. The logic or procedure to determine the amount to be invested in risky assets is determined on the basis of time horizon, obje ctives, and diversification. Objectives and Asset Mix The main objective of the portfolio is to get adequate amount of long term growth in income. In order to achieve this objective, substantial amount of the investment corpus should be invested into equity class ETFs and fewer portions should be invested in debt instruments. This is because, while the equity will ensure long term capital growth for the investor through proper diversification, debt portion of portfolio will ensure fixed and stable income for the investor. Proper diversification will help reduce the overall portfolio risk by spreading stock specific risk into combination of securities. Determining Time Frame of Investment In order to evaluate the performance of the portfolio, sufficient time horizon should be chosen since the objective of portfolio is long term capital growth and not speculative trading. Keeping the objective of portfolio, a time horizon of minimum five years will be chosen to evaluate the performanc e of the securities. Money Management through ETF On the basis of the portfolio objectives, time frame of investment and risk profile analysis discussed earlier it can be said that Exchange Traded Funds (ETF) can be an effective money management tool. ETFs are investment funds that are often traded as commodity in the stock markets. Thus, ETF funds are traded similar to stocks in the stock exchanges but at the same time it is essential to know the process of buying and selling of ETFs in the stock exchanges. The process allows market players to determine ETF prices by analyzing the forces of demand and supply of ETFs in the market throughout the day. If appropriate strategy is not formulated then the investor might be adversely affected from price fluctuations throughout the day. Further the investment objective will determine whether the portfolio will be able to provide sufficient returns to the investors to attain such objectives