Essentials of Financial Risk Management, Essay Example

In your opinion, if investors are risk-adverse, why do they still invest in securities that have high standard deviations? How would you recommend that an investor reduce the level of risk they are subject to and how would you explain that not all risk can be eliminated?

In understanding the basics of investment rules, it is essential to take note of the fact that risk is a particular element that needs to be given attention to. There are no investments that have no risk; reality is, when the issue comes to determining the real value of money, risk often becomes a part of the determinable course of development that every investor wants to embrace. Money matters are always uncertain in nature especially with the kind of irregularities that are happening at present (Horcher, 2005). It could be observed that somehow, with the changing pattern of cash flow in the market, it is evidently obvious how monetary worth also changes through time. In financial investment matters, it is considered common to have monetary balance be a source of risk for most investors.

It is impossible to enter into any financial investment policy without the risk of losing. Investors who are realistic enough to understand such matter are considerably able to take note of the fact that when they put their monetary assets for investment, they are risking the full value of such asset to losing in the international stock market exchange (Horcher, 2005). Nevertheless, those who have already tried losing and gaining in the field of international investments do know that the course of monetary “gambling’ they take could only gain more if they do risk more.

In a way, the level of risk is somewhat a given factor that cannot be avoided; nevertheless, it is with such risk that the possibility of gaining more from the international market could be realized accordingly. While there are those who many not fully understand the course of investment that is considered healthy in nature, expert investors know for a fact that the condition of development that the market takes follow different patterns of twists and turns that directly affect the value of the money they have invested (McNeil, 2005). Depending on the season and the behavior of the financial market, it could be analyzed how the modern conditions of investment operations directly make a mark on how one investment would fair to survive the challenge of gaining from a distinctively diverse and constantly transforming market.

While financial risks are unavoidable, they are considered controllable and manageable in nature. What does this mean? Noticeably, the way money is managed and observed as to what particular policy of investment it should be enrolled in could be realized through the implicative application of market-observation. This entails the need of the investors to become aware of what is happening through recording results of their investments within specific time periods. Studying the behavior of the market during these periods would help investors see the actual situations that they have to deal with [especially during particular financial seasons of the year]. To note, there is always something that would affect the nature of investment that an individual or an institution takes into account; the surrounding elements are expected to have a direct mandate on how the invested amount of money would fare well in the market (McNeil,, 2005).

Measuring risks in the market shall allow investors to set a specific time as to when they are to retract or when they are to push forward particular amounts of their invested assets to assure good returns as expected. When failures occur and losses are incurred, investors ought to be strong enough to face the challenge, to stick to the process and to be more vigilant the next time that market transformation happens. Noticeably, this is where the keen observation and strategic mandate of the investors come into account.

References

Lecture Notes: Corporate Finance 1. Week 9: Diversification and the Capital Asset Pricing Model.

McNeil, Alexander J.; Frey, Rüdiger; Embrechts, Paul (2005). Quantitative risk management: concepts, techniques and tools. Princeton University Press. pp. 2–3.

Horcher, Karen A. (2005). Essentials of financial risk management. John Wiley and Sons. pp. 1–3.