How does the investor assess the portfolio risk?
Every investment demands an unqualified amount of risk and for a fortune hunter to designate a complimentary tribute this risk has to be compensated duly. This reward is in the form of something called the risk premium or handily the premium. Risk is consequently central to accrual markets or investing because without risk there can be no gains. Successful investors use accrual designate risk supervision strategies to minimize risk and maximize profit.
Keeping your losses less than your gains is the key to sustained trading success. Limiting or managing your greatest possible loss is often easier than figuring out your maximum possible profit.
The biggest problem that investor psychology has is that they always look towards the Reward side and ignore the Risk Profile of the investments. While Fancy returns are always possible.
Let’s look at these 3 scenarios, these are the systems with corresponding profitability
| A | Profitable | 50% |
| B | Profitable | 20% |
| C | Profitable | 8% |
But they can only be achieved by taking higher risks. If suppose we have 3 different avenues of Investments with the corresponding Rewards, it seems obvious that the Investment in A category is the most suitable for any investor with a supreme return of 50%
But again the fallacy here is that without risk it can’t be ascertained how good the system is. Let’s look again at the 3 Investment vehicles with the Risk merits
Relooking at with Risk factor
| A | Profitable 50% | With an Expected Risk of -35% |
| B | Profitable 20% | With an Expected Risk of -8% |
| C | Profitable 8% | With an Expected Risk of -6% |
Considering the Risk factors of each investment
The Golden ratio of Risk Reward is arrived at
| A | Profitable 50% | -35% | 1.42 |
| B | Profitable 20% | -8% | 2.5 |
| C | Profitable 8% | -6% | 1.33 |
Risk appetite and risk capacity are strongly linked to risk tolerance. Over time, your risk tolerance will shift. It will determine your risk capability at any particular period. Risk capacity is also the amount of risk that must be accepted to meet investing objectives. Risk appetite takes into account both capacity and tolerance, as well as the current investing landscape.
Certain strategies can be employed to mitigate the risk in a stock market. The strategies are as follows:
Follow the trend of the market: Follow the market’s trend: This is a tried and true strategy for reducing risk in the stock market. The issue is that spotting market trends is difficult, and trends change quickly. A market trend might last a day, a month, or a year, and short-term trends can operate inside longer-term trends.
Portfolio Diversification: Diversifying your risk by investing in a portfolio is another effective risk management approach in the stock market. In a portfolio, you spread your money over many firms, industries, and asset classes. While one investment’s market value may decline, another’s market value may grow. Mutual funds are another way to spread the risk.
Stop Loss: A stop-loss, also known as a trailing stop, is another technique that ensures you don’t lose money if the stock falls too much. In this technique, the investor has the option of selling a stock if it falls below a particular threshold. When a stock falls below a certain level or falls fast, some investors employ self-discipline to sell.
Risk management has progressed from a purely academic discipline to a full-fledged career path that many people are opting for these days. The reason, as a discipline, has broadened and taken on many forms, making it an increasingly important function in today’s businesses. It’s no surprise that the number of universities offering specialist risk management courses is growing, as is the number of people interested in learning more about risk management. It’s no surprise that a rising number of colleges are offering specialist risk management courses and that the number of people enrolling is rapidly expanding. Entry-level foundation courses are available in colleges, as well as higher-order courses at universities.
With uncertainty looming big in today’s corporate environment, the risk management profession and experts have grown in importance. It’s an important line of defence and a source of competitive advantage on par with corporate.
Risk management specialists typically begin their careers in broking or underwriting. With time, their work portfolio expands as they take on more responsibilities, such as risk financing and risk control, before eventually applying it to management, accounting, marketing, and finance.
Assessing and identifying operational risk are among a risk management professional’s major tasks. The next step is to devise risk-mitigation and risk-mitigation methods. He or she collaborates with business managers on new company ideas and manages the risk that goes along with them.
Aside from traditional management abilities, the job demands specific qualities such as planning, prioritising, and execution skills, as well as an eye for detail.
Every war is won before it is fought,” Chinese military commander Sun Tzu famously stated. This term suggests that wars are won via preparation and strategy rather than fighting. Successful traders often use the term “plan the trade and trade the plan,” as well. Planning, just like in battle, may be the difference between success and defeat.
