Investment and Risk Are the

¶ … Investment and risk are the two sides of a same picture. The essence of risk is at the heart of investment management. The investors as well as analysts are concerned with the association of risk in an investment. There are numerous tools available to judge the level of risk associated with an investment. This particular assignment is about discussing the different assets categories along with the provision of risk association with each.

There are five assets' classes that have been selected to complete this piece of work which predominantly are Stocks, Bonds, Mutual Funds, Options and Precious Metals. In this piece of work all of these asset classes have been analyzed from three different angles: the historical performance of each asset class, how the performance of each asset class can be tracked and how the benchmark will be determined for each asset class.

Stocks A stock also known as shares is the most common type of investment which has been used by the investors from a number of years. The term stock or share will be used interchangeably throughout this particular heading. Usually shares have been issued by the corporations both domestic and multinational organization in order to appreciate the amount of capital to run the organization (Chance & Brooks, 2009). Investment in stocks is the most common way of investing and managing the portfolio as far as an investor is concerned.

There are numerous advantages and disadvantages associated with the investment in stocks. The biggest advantage of investing in the stocks is the probability to get the stable flow of dividends in the future. Apart from this advantage there is a sort of risk also associated with the investment in the stocks. The shares of the company usually come under the umbrella of 'Strong Form Hypothesis" because any mishap with the company either economical or non-economical would yield negative impact on the market value of the floating shares of the company.

At the time of the liquidation of the company, shareholders would be facilitated at the end which shows that there are other investors as well which have been preferred by the companies as far as facilitation is concerned. Investors have to be proactive while investing in the stocks of a company because the rate of the stocks fluctuates heavily. There are numerous tools which have been used by the analysts and investors to judge the performance of the stocks and the amount of risk associated with it.

From the last few decades, the investment in the shares has been the most delightful and lucrative experience for the investors because of timely and healthy dividends. However, after the current economic downturn; this particular stance got blurred. The tool which is commonly used to judge the actual market value of the stocks is the Dividend Discount Model (DDM) also known as Gordon Growth Model (GGM).

This particular model enables an investor to compute the actual market value of the stocks through the company's Return on Equity (ROE), growth rate and dividend. The actual market value is known as the terminal value or intrinsic value of the company's stocks which can then be matched with the benchmark of the company. Investors usually make the actual traded value of the stocks as the benchmark rate according to the matching strategy and the recommendation of buying, selling or holding would be initiated. The second asset class is Bonds.

Bonds Apart from the stocks, there is another category of investment called bonds which is again very common and sophisticated from the view point of an investor. The issuer of the bonds can be more than one, as it can be government, corporations, schools and banks. Some similarities and difference are present in bonds and stocks. A bond also pays dividend to its holder called the coupon. Additionally, a bond has a finite life while stock has an infinite life.

However, a major issue with the investment in bonds is the unavailability of a large and sophisticated market of bond indices (Chance & Brooks, 2009). The bond market is not as common as the stock market and that is the main reason why a large number of investors prefer stocks on bonds. The biggest risk of investing in the bonds is its association with the prevailing interest rates within the country. This particular risk can be overweighed comprehensively with the help of Bond Valuation Models (BVM).

Bond valuation model computes the present value of the future cash flows of the bonds which than enables the investor to recommend a fruitful strategy. Investor uses the actual traded value of the bond as the benchmark value by which the investor compares the present value result with the traded value to initiate a strategy of buying, selling or holding. The next class is Mutual Funds. Mutual Funds Mutual Funds have emerged as one of the best investment tactics from the standpoint of an investor.

From last few years; the stance of investment in the mutual funds increased considerably merely because of its wonderful performance. Basically mutual fund is a pool of funds which invested mutually in the primary and secondary market (Chisholm, 2010). A fund management company accumulates the funds from different investors and invests the pool in the financial market. It then distributes the profit according to the proportion of the investment.

A mutual fund is the most secure, reliable and least risky investment from the standpoint of an investor because the fund management company gives full confidence to the investor regarding the downgraded of his/her investment. The only risk which this particular investment has is the due diligence of the fund management company itself. It is a prior duty of the management company to place the pool of funds at a place which has attractive grading.

Rating companies like Moody's, Fitch and S&P are the best benchmarks available both for the investors and management officials to search the best place of investment (Chisholm, 2010). The grading posted by these companies is called Mutual Fund performance indicator which also includes the provision of money market investment. If the performance indicators will be read out sufficiently and investment has been placed at high graded securities then the likelihood of risk pertaining to mutual fund investment will be decreased considerably. Options is the next asset.

Options Option is another important category of investment which has been used widely by investors in recent times. In finance, an option is a derivative financial instrument that establishes a contract between two parties concerning the buying or selling of an asset at a reference price. An option is basically a tool used specifically for the risk management. This particular tool is been used widely in the investment and risk management literature.

The biggest problem with the usage of options and derivatives is its complex nature as large number of people and investors still unaware with its trading. The riskiness of loosing the money in the investment of option is very high and on the contrary the probability of earning money is also very high (Donald, 2004). This particular essence has attracted thousands of investors worldwide especially the big giants like banks, exchange companies and multinational organizations to use options to increase the level of its benefits and decrease the chances of risk.

Likewise to the mutual fund performance indicators, there are option performance indicators as well.