Investment and Portfolio Managment Essay Example | Topics and Well Written Essays - 5250 words

Investment and Portfolio Managment - Essay ExampleInvestors must take account of the interplay between addition returns when evaluating the lay on the line of portfolio at a most basic level for example, an insurance contract serves to reduce risk by providing a large payoff when other part of the portfolio is faring poorly. A fire insurance policy pays off when another asset in the portfolio-a house or factory, for example-suffers a big loss in value. The offsetting pattern of returns on these two assets (the house and the insurance policy) stabilizes the risk of the overall(a) portfolio. Investing in an asset with a payoff pattern that offsets exposure to a particular source of risk is called hedging.Anther means to control portfolio risk is diversification, whereby investments ar made in a wide variety of assets so that exposure to the risk of whatever particular security is limited. By placing ones eggs in many baskets, overall portfolio risk actually may be less than the ris k of any component security considered in isolation. So, using portfolio is very much important in investment decision-makingProf Stein should protect the value of his sh atomic number 18s before the corporation issues an IPO by using derivative products such as options, forwards and futures. Derivative products help to avoid risk of price fluctuations and others.In hedging, Derivatives are tools for ever-changing the firms risk exposure. A derivative is a financial instrument whose payoffs and values is derived from, or depends on, something else. For example, an option is a derivative. The value of a call option depends on the value of the underlying stock on which it is written. Actually call options are quite complicated examples of derivatives. The vast majority of derivatives are simpler than call options. Most derivatives are forward or futures agreements or what are called swaps.An unlimited variety of payoff patterns can be achieved by combining puts and calls with various exercise prices. Some strategies are discussed belowProtective PutUnder this one would like to invest in a stick, but one is willing to bear potential losses beyond some given level of investing in the stock alone seems risky to one because in principle one could lose all the money one invest. One might