Assignment 1: Investment Basics
To begin, according to investopedia, risk tolerance is the degree of uncertainty that an investor can handle when a negative change takes place in the portfolio they are currently working on. With regards to risk tolerance there are a few key points that can determine the risk; age, income, and financial goals that are set by yourself or your client. In order to create a process for accessing the clients’ tolerance for investment risk is to find out about their assets, whether it is risky or risk-free, but jumping into making a portfolio. A lot of investors will look at instruments such as money markets, treasury bills, and CDs as fairly safe in terms of default credit risk, according to Bodie, Kane, Marcus, 132). You have to determine which are safe and which are not so you will know how much of the portfolio will be taken up by certain factors in the clients financial information. Another good factor is that money markets instruments interest rates tend not to fluctuate that often because of the short maturity dates. Also the client should maintain a risk free asset of 7% (P. 133). Once you have the risk free assets separated from the risky assets, you can now begin to build the portfolio. Also keep in mind the key points that are needed for the portfolio. Now you will have the financial information, their age, their financial goals, and income being brought in. With investing there comes risk, you are taking a chance every time you put your money into an investment, as you do not know the outcome. Different instruments carry different risks. To begin, the bond is a considered to be safe, but as far as the market goes, it can’t go entirely without risk. According to financial web, the risks that are associated with the bond is interest rate risk where whenever the market changes so does the interest rate of the bond, meaning good