Chapter 1Design of study

OBJECTIVES OF THE STUDY 1. The main objective of this project is to understand what investment is and overview various investment options. 2. To observe the relation between Returns and Risk in i n v e s t me n t ma n a g e m e n t . 3 . T o u n d e r s t a n d p o l i c i e s t o mi n i mi z e r i s k s a n d m a x i m i z e the returns.

LIMITATIONS Time constraints The time stipulated for the project is less and thus there are chances that some information might have been left out! however due care is taken to include all information needed.

EXECUTIVE SUMMERY"hen building a portfolio! investors have to choose from a wide range of investment st#les. $alue investors! trend followers! global macro or volatilit# arbitragers! to name just a few! each o er a di erent wa# of generating returns. %nder the reasonable & #et controversial & assumption that markets do work! an# extra return is earned in exchange for a certain degree of risk. 'ence! before even measuring it! it is essential to identif# and understand that risk in order to anal#ze the returns from certain strategies. %nfortunatel#! this is a di cult task! especiall# in the case of d#namic investment strategies! which are known to generate as#mmetric returns. (ince it is well established that options can be replicated using d#namic strategies! the approach developed in this stud# consists in exploring the extent to which an option pro)le can be associated with a given d#namic strateg#. To keep things simple! we focus on strategies running on a single asset. *xcluding classical anal#sis of constant mix strategies! some of this ke# )ndings are+ ,1- .an# d#namic strategies returns can be broken down into an option pro)le and some trading impact! ,2- /ontrarian strategies on a single asset tend to generate fre0uent limited gains! in exchange for infre0uent larger losses! ,3- Trend following strategies on a single asset will perform if the absolute value of the realized (harpe ratio is above a certain threshold. The shorter term the investment st#le! the higher this threshold.

Chapter 2Introduction to Investment management

MEANING OF INVESTMENT
The mone# we earn is partl# spent and the rest saved for meeting future expenses. 1nstead of keeping the savings idle we ma# like to use savings in order to get return on it in the future. This is called 1nvestment. 1nvestment is the emplo#ment of funds with the aim of achieving additional income or growth in value. The essential 0ualit# of an investment is that it involves 2waiting3 for a reward. 1t involves the commitment of resources which have been s a v e d o r p u t a w a # f r o m c u r r e n t c o n s u m p t i o n i n t h e h o p e t h a t s o m e b e n e f i t s w i l l accrue in future. The term 21nvestment3 does not appear to be as simple as it has been defined. 1nvestment has been further categorized b# financial experts and economists.

Why should o ! " #!s$% 4ne needs to invest to+ 5 earn return on our idle resources. 5 generate a specified sum of mone# for a specific goal in life 5 make a provision for an uncertain future

4ne of the important reasons wh# one needs to invest wisel# is to meet the cost of 1nflation. 1nflation is the rate at which the cost of living increases. The cost of living is simpl# what it costs to bu# the goods and services we need to live. 1nflation causes mone# to lose value because it will not bu# the same amount of a good or a service in the future as it does now or did in the past. 6or example! if there was a 78 inflation rate for the next 29 #ears! a Rs. 199 purchase toda# would cost Rs. 321 in 29 #ears. This is wh# it is important to consider inflation as a factor in an# long term investment strateg#. Remember to look at an investment:s :real: rate of return! which is the return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value. 6or example! if the annual inflation rate is 78! then the investment will need to earn more than 78 to ensure it increases in value. 1f the after tax return on our investment is less than the inflation rate! then our assets have actuall# decreased in value; that is! the# won:t bu# as much toda# as the# did last #ear.

Wh! $o s$&'$ I #!s$" (% The sooner one starts investing the better. <# investing earl# we allow our investments more time to grow! whereb# the concept of compounding ,as we shall see later- increases our income! b# accumulating the principal and the interest or dividend earned on it! #ear after #ear.

Th! $h'!! (old! 'ul!s )o' &ll " #!s$o's &'!* 5 1nvest earl# 5 1nvest regularl# 5 1nvest for long term and not short term

Wh&$ +&'! should o ! $&,! -h"l! " #!s$" (%

<efore making an# investment! one must ensure to+ 1. obtain written documents explaining the investment 2. read and understand such documents 3. verif# the legitimac# of the investment =. find out the costs and benefits associated with the investment >. assess the risk return profile of the investment 7. know the li0uidit# and safet# aspects of the investment ?. ascertain if it is appropriate for our specific goals @. compare these details with other investment opportunities available A. examine if it fits in with other investments we are considering or we have alread# made 19. deal onl# through an authorized intermediar# 11. seek all clarifications about the intermediar# and the investment 12. explore the options available to we if something were to go wrong! and then! if satisfied! make the investment. These are called the Twelve 1mportant (teps to 1nvesting.

Wh&$ "s .!& $ /y I $!'!s$% "hen we borrow mone#! we are expected to pa# for using it & this is known as 1nterest. 1nterest is an amount charged to the borrower for the privilege of using the lender3s mone#. 1nterest is usuall# calculated as a percentage of the principal balance ,the amount of mone# borrowed-. The percentage rate ma# be fixed for the life of the loan! or it ma# be variable! depending on the terms of the loan.

Wh&$ )&+$o's d!$!'." ! " $!'!s$ '&$!s% "hen we talk of interest rates! there are different t#pes of interest rates rates that banks offer to their depositors! rates that the# lend to their borrowers! the rate at which the Bovernment borrows in the <ondCBovernment (ecurities market! rates offered to investors in small savings schemes like D(/! EE6! rates at which companies issue fixed deposits etc. The factors which govern these interest rates are mostl# econom# related and are commonl# referred to as macroeconomic factors. (ome of these factors are+ 5 Femand for mone# 5 Gevel of Bovernment borrowings 5 (uppl# of mone# 5 1nflation rate 5 The Reserve <ank of 1ndia and the Bovernment policies which determine some of the variables mentioned above

INVESTMENT O0TIONS

4ne ma# invest in+ 5 Eh#sical assets like real estate! goldCjeweller#! commodities etc. andCor 5 6inancial assets such as fixed deposits with banks! small saving instruments with post offices! insuranceCprovidentCpension fund etc. or securities market related instruments like shares! bonds! debentures etc.

Wh&$ &'! #&'"ous Sho'$-$!'. )" & +"&l o1$"o s &#&"l&/l! )o' " #!s$.! $%

<roadl# speaking! savings bank account! mone# marketCli0uid funds and fixed deposits with banks ma# be considered as short term financial investment options+ S&#" (s B& , A++ou $ is often the first banking product people use! which offers low interest ,=8 >8 p.a.-! making them onl# marginall# better than fixed deposits. Mo !y M&',!$ o' L"2u"d Fu ds are a specialized form of mutual funds that invest in extremel# short term fixed income instruments and thereb# provide eas# li0uidit#. %nlike most mutual funds! mone# market funds are primaril# oriented towards protecting our capital and then! aim to maximize returns. .one# market funds usuall# #ield better returns than savings accounts! but lower than bank fixed deposits. F"3!d D!1os"$s with <anks are also referred to as term deposits and minimum investment period for bank 6Fs is 39 da#s. 6ixed Feposits with banks are for investors with low risk appetite! and ma# be considered for 7 12 months investment period as normall# interest on less than 7 months bank 6Fs is likel# to be lower than mone# market fund returns.
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Wh&$ &'! #&'"ous Lo (-$!'. )" & +"&l o1$"o s &#&"l&/l! )o' " #!s$.! $%

Eost 4ffice (avings (chemes! Eublic Erovident 6und! /ompan# 6ixed Feposits! <onds and Febentures! .utual 6unds etc. 0os$ O))"+! S&#" (s+ Eost 4ffice .onthl# 1ncome (cheme is a low risk saving instrument! which can be availed through an# post office. 1t provides an interest rate of around @8 per annum! which is paid monthl#. .inimum amount! which can be invested! is Rs. 1!999C and additional investment in multiples of 1!999C . .aximum amount is Rs. 3!99!999C ,if (ingle- or Rs. 7!99!999C ,if held Hointl#- during a #ear. 1t has a maturit# period of 7 #ears. Eremature withdrawal is permitted if deposit is more than one #ear old. I deduction of >8 is levied from the principal amount if withdrawn prematurel#. 0u/l"+ 0'o#"d! $ Fu d+ I long term savings instrument with a maturit# of 1> #ears and interest pa#able at @8 per annum compounded annuall#. I EE6 account can be opened through a nationalized bank at an#time during the #ear and is open all through the #ear for depositing mone#. Tax benefits can be availed for the amount invested and interest accrued is tax free. I withdrawal is permissible ever# #ear from the seventh financial #ear of the date of opening of the account and the amount of withdrawal will be limited to >98 of the balance at credit at the end of the =th #ear immediatel# preceding the #ear in which the amount is withdrawn or at the end of the preceding #ear whichever is lower the amount of loan if an#. Co.1& y F"3!d D!1os"$s+ These are short term ,six months- to medium term ,three to five #ears- borrowings b# companies at a fixed rate of interest which is pa#able monthl#! 0uarterl#! semi annuall# or annuall#. The# can also be cumulative fixed deposits where the entire principal along with the interest is paid at the end of the loan period. The rate of interest varies between 7 A8 per annum for compan# 6Fs. The interest received is after deduction of taxes.
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Bo ds+ 1t is a fixed income ,debt- instrument issued for a period of more than one #ear with the purpose of raising capital. The central or state government! corporations and similar institutions sell bonds. I bond is generall# a promise to repa# the principal along with a fixed rate of interest on a specified date! called the .aturit# Fate. Mu$u&l Fu ds+ These are funds operated b# an investment compan# which raises mone# from the public and invests in a group of assets ,shares! debentures etc.-! in accordance with a stated set of objectives. 1t is a substitute for those who are unable to invest directl# in e0uities or debt because of resource! time or knowledge constraints. <enefits include professional mone# management! bu#ing in small amounts and diversification. .utual fund units are issued and redeemed b# the 6und .anagement /ompan# based on the fund:s net asset value ,DI$-! which is determined at the end of each trading session. DI$ is calculated as the value of all the shares held b# the fund! minus expenses! divided b# the number of units issued. .utual 6unds are usuall# long term investment vehicle though there some categories of mutual funds! such as mone# market mutual funds which are short term instruments.

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OTHER IM0ORTANT TERMS IN INVESMENT MANAGEMENT-

Wh&$ "s .!& $ /y & S$o+, E3+h& (!% The (ecurities /ontract ,Regulation- Ict! 1A>7 J(/RIK defines 2(tock *xchange3 as an#bod# of individuals! whether incorporated or not! constituted for the purpose of assisting! regulating or controlling the business of bu#ing! selling or dealing in securities. (tock exchange could be a regional stock exchange whose area of operationCjurisdiction is specified at the time of its recognition or national exchanges! which are permitted to have nationwide trading since inception. D(* was incorporated as a national stock exchange.

Wh&$ "s & 4E2u"$y56Sh&'!% Total e0uit# capital of a compan# is divided into e0ual units of small denominations! each called a share. 6or example! in a compan# the total e0uit# capital of Rs 2!99!99!999 is divided into 29!99!999 units of Rs 19 each. *ach such unit of Rs 19 is called a (hare. Thus! the compan# then is said to have 29!99!999 e0uit# shares of Rs 19 each. The holders of such shares are members of the compan# and have voting rights.

Wh&$ "s & 4D!/$ I s$'u.! $5% Febt instrument represents a contract whereb# one part# lends mone# to another on pre determined terms with regards to rate and periodicit# of interest! repa#ment of principal amount b# the borrower to the lender. 1n the 1ndian securities markets! the term 2bond3 is used for debt instruments issued b# the /entral and (tate governments and public sector organizations and the term 2debenture3 is used for instruments issued b# private corporate sector.
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Wh&$ "s & D!'"#&$"#!% Ferivative is a product whose value is derived from the value of one or more basic variables! called underl#ing. The underl#ing asset can be e0uit#! index! foreign exchange ,forex-! commodit# or an# other asset. Ferivative products initiall# emerged as hedging devices against fluctuations in commodit# prices and commodit# linked derivatives remained the sole form of such products for almost three hundred #ears. The financial derivatives came into spotlight in post 1A?9 period due to growing instabilit# in the financial markets. 'owever! since their emergence! these products have become ver# popular and b# 1AA9s! the# accounted for about two thirds of total transactions in derivative products.

Wh&$ "s & Mu$u&l Fu d% I .utual 6und is a bod# corporate registered with (*<1 ,(ecurities *xchange <oard of 1ndia- that pools mone# from individualsCcorporate investors and invests the same in a variet# of different financial instruments or securities such as e0uit# shares! Bovernment securities! <onds! debentures etc. .utual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. .utual funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the mone# leads to an appreciation in the value of the units held b# investors. The investment objectives outlined b# a .utual 6und in its prospectus are binding on the .utual 6und scheme. The investment objectives specif# the class of securities a .utual 6und can invest in. .utual 6unds invest in various asset classes like e0uit#! bonds! debentures! commercial paper and government securities. The schemes offered b# mutual funds var# from fund to fund. (ome are pure e0uit# schemes; others are a mix of e0uit# and bonds. 1nvestors are also given the option of getting dividends! which are declared periodicall# b# the mutual fund! or to participate onl# in the capital appreciation of the scheme.
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Wh&$ "s & I d!3% In 1ndex shows how a specified portfolio of share prices is moving in order to give an indication of market trends. 1t is a basket of securities and the average price movement of the basket of securities indicates the index movement! whether upwards or downwards.

Wh&$ "s & D!1os"$o'y% I depositor# is like a bank wherein the deposits are securities ,viz. shares! debentures! bonds! government securities! units etc.- in electronic form.

Wh&$ "s D!.&$!'"&l"7&$"o % Fematerialization is the process b# which ph#sical certificates of an investor are converted to an e0uivalent number of securities in electronic form and credited to the investor3s account with his Fepositor# Earticipant ,FE-.

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Chapter 3- Investment management and its process

I #!s$.! $ .& &(!.! $ is the professional asset management of various securities ,shares! bonds and other securities- and assets ,e.g.! real estate- in order to meet specified investment goals for the benefit of the investors. 1nvestors ma# be institutions ,insurance companies! pension funds! corporations! charities! educational establishments etc.- or private investors ,both directl# via investment contracts and more commonl# via collective investment schemes e.g. mutual funds or exchange traded funds-. The term asset management is often used to refer to the investment management of collective investments! while the more generic fund management ma# refer to all forms of institutional investment as well as investment management for private investors. 1nvestment managers who specialize in advisory or discretionary management on behalf of ,normall# wealth#- private investors ma# often refer to their services as mone# management or portfolio management often within the context of so called Lprivate bankingL. The provision of investment management services includes elements of financial statement anal#sis! asset selection! stock selection! plan implementation and ongoing monitoring of investments. /oming under the remit of financial services man# of the world:s largest companies are at least in part investment managers and emplo# millions of staff. 6und manager refers to both a firm that provides investment management services and an individual who directs fund management decisions.

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8 S$!1s o) I #!s$.! $ M& &(!.! $ 0'o+!ss

<efore investing! investment management should be done. 1nvestment .anagement is a five step process. 6ollowing are the > steps of investment management+

9- S!$$" ( $h! I #!s$.! $ O/:!+$"#!s*The first and the basic step for investment is that the investor should set his investment objectives. These investment objectives var# from person to person. 6or example for an individual the objective ma# be to optimize the rate of return. ;- Es$&/l"sh" ( I #!s$.! $ 0ol"+y**stablishing investment polic# refers to the allocation of asset amongst the major allocated assets in the capital market. The range of allocated asset is from e0uities! debt! fixed income securities! real estate! foreign securities to currencies. Restraint of environment and that of investor should be kept in mind while establishing the investment polic#. <- S!l!+$" ( $h! 0o'$)ol"o S$'&$!(y*The portfolio strateg# selected should be in accordance and in conformit# with the investment objectives and investment policies. 1f these are not in accordance with each other then the whole investment management process will collapse. =- S!l!+$" ( $h! Ass!$s*The assets to be placed in the portfolio have to be selected b# the investor. This is the point where real creation of portfolio will take place after the selection of assets in which to invest b# the manager or investor. That asset will be selected which will give best return in available resources and which involves lowest risk. The assets can be shares! stocks! art objects! securities! gold! propert# etc.

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8- M!&su'" ( & d E#&lu&$" ( 0!')o'.& +!*1n this step the performance of the portfolio will be measured in comparison to the realistic benchmark or the standard set b# the investor. Risk and return will be evaluated b# the manager. .easuring and evaluating the portfolio will give the feedback to the investor and will in turn help the investor to improve the 0ualit# as well as the performance of the portfolio of investment.

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Chapter 4Risk and Return Analysis

I #!s$.! $ R"s,"hile investing! we take certain risks. "ith insured bank investments! such as certificates of deposit ,/Fs-! we face inflation risk! which means that we ma# not earn enough over time to keep pace with the increasing cost of living. "ith investments that aren:t insured! such as stocks! bonds! and mutual funds! we face the risk that we might lose mone#! which can happen if the price falls and we sell for less than we paid to bu#. Hust because we take investment risks doesn:t mean we can:t exert some control over what happens to the mone# we invest. 1n fact! the opposite is true. 1f we know the t#pes of risks we might face! make choices about those we are willing to take! and understand how to build and balance our portfolio to offset potential problems! we are managing investment risk to our advantage.

Why T&,! R"s,s% The 0uestion we might have at this point is! L"h# would 1 want to risk losing some or all of m# mone#ML 1n fact! we might not want to put mone# at risk that we expect to need in the short termNto make the down pa#ment on a home! for example! or pa# a tuition bill for next semester! or cover emergenc# expenses. <# taking certain risks with the rest of our mone#! however! we ma# earn dividends or interest. 1n addition! the value of the assets we purchase ma# increase over the long term. 1f we prefer to avoid risk and put our mone# in an 6F1/ insured certificate of deposit ,/F- at our bank! the most we can earn is the interest that the bank is pa#ing. This ma# be good enough in some #ears! sa#! when interest rates are high or when other investments are falling.
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<ut on average! and over the long haul! stocks and bonds tend to grow more rapidl#! which would make it easier or even possible to reach our savings goals. That:s because avoiding investment risk entirel# provides no protection against inflation! which decreases the value of our savings over time. 4n the other hand! if we concentrate on onl# the riskiest investments! it:s entirel# possible! even likel#! that we will lose mone#. 6or man# people! it:s best to manage risk b# building a diversified portfolio that holds several different t#pes of investments. This approach provides the reasonable expectation that at least some of the investments will increase in value over a period of time. (o even if the return on other investments is disappointing! our overall results ma# be positive.

Ty1!s o) I #!s$.! $ R"s, There are man# different t#pes of investment risk. The two general t#pes of risk are+

Gosing mone#! which we can identif# as investment risk Gosing bu#ing poour! which is inflation risk

1t probabl# comes as no surprise that there are several different wa#s we might lose mone# on an investment. To manage these risks! we need to know what the# are. .ost investment risk is described as either s#stematic or nons#stematic. "hile those terms seem intimidating! what the# refer to is actuall# straightforward. Sys$!.&$"+ R"s, (#stematic risk is also known as market risk and relates to factors that affect the overall econom# or securities markets. (#stematic risk affects all companies! regardless of the compan#:s financial condition! management! or capital structure! and! depending on the investment! can involve international as well as domestic factors. 'ere are some of the most common s#stematic risks+
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I $!'!s$-'&$! '"s, describes the risk that the value of a securit# will go down because of changes in interest rates. 6or example! when interest rates overall increase! bond issuers must offer higher coupon rates on new bonds in order to attract investors. The conse0uence is that the prices of existing bonds drop because investors prefer the newer bonds pa#ing the higher rate. 4n the other hand! there:s also interest rate risk when rates fall because maturing bonds or bonds that are paid off before maturit# must be reinvested at a lower #ield. I )l&$"o '"s, describes the risk that increases in the prices of goods and services! and therefore the cost of living! reduce our purchasing poour. Get:s sa# a can of soda increases from O1 to O2. 1n the past! O2 would have bought two cans of soda! but now O2 can bu# onl# one can! resulting in a decline in the value of our mone#. 1nflation risk and interest rate risk are closel# tied! as interest rates generall# rise with inflation. <ecause of this! inflation risk can also reduce the value of our investments. 6or example! to keep pace with inflation and compensate for the loss of purchasing poour! lenders will demand increased interest rates. This can lead to existing bonds losing value because! as mentioned above! newl# issued bonds will offer higher interest rates. 1nflation can go in c#cles! however. "hen interest rates are low! new bonds will likel# offer lower interest rates.

Cu''! +y '"s, occurs because man# world currencies float against each other. 1f mone# needs to be converted to a different currenc# to make an investment! an# change in the exchange rate between that currenc# and ours can increase or reduce our investment return. "e are usuall# onl# impacted b# currenc# risk if we invest in international securities or funds that invest in international securities. 6or example! assume that the current exchange rate of the %.(. dollar to <ritish pound is O1P9.>3 <ritish pounds. 1f we invest O1!999 in a mutual fund that invests in the stock of <ritish companies! this will e0ual >39 pounds ,O1!999 x 9.>3 pounds P >39 pounds-. (ix months later! assume the dollar strengthens and the exchange rate becomes O1P9.7> pounds. 1f the value of the fund does not change! converting the original investment of >39
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pounds into dollars will return onl# O@1> ,>39 poundsC9.7> pounds P O@1>-. /onse0uentl#! while the value of the mutual fund has not changed in the local currenc#! a change in the exchange rate has devalued the original investment of O1!999 into O@1>. 4n the other hand! if the dollar were to weaken! the value of the investment would go up. (o if the exchange rate changes to O1P9.=3 pounds! the original investment of O1!999 would increase to O1!233 ,>39 poundsC9.=3 pounds P O1!233-. Is with most risks! currenc# risk can be managed to a certain extent b# allocating onl# a limited portion of our portfolio to international investments and diversif#ing this portion across various countries and regions.

L"2u"d"$y '"s, is the risk that we might not be able to bu# or sell investments 0uickl# for a price that is close to the true underl#ing value of the asset. (ometimes we ma# not be able to sell the investment at all if there are no bu#ers for it. Gi0uidit# risk is usuall# higher in over the counter markets and small capitalization stocks. 6oreign investments can pose li0uidit# risks as well. The size of foreign markets! the number of companies listed! and hours of trading ma# limit our abilit# to bu# or sell a foreign investment. So+"o1ol"$"+&l '"s, is the possibilit# that instabilit# or unrest in one or more regions of the world will affect investment markets. Terrorist attacks! war! and pandemics are just examples of events! whether actual or anticipated! that impact investor attitudes toward the market in general and result in s#stem wide fluctuations in stock prices. (ome events! such as the (eptember 11! 2991! attacks on the "orld Trade /enter and the Eentagon! can lead to wide scale disruptions of financial markets! further exposing investments to risks. (imilarl#! if we are investing overseas! problems there ma# undermine those markets! or a new government in a particular countr# ma# restrict investment b# non citizens or nationalize businesses.

4ur chief defense against s#stematic risk! as we:ll see! is to build a portfolio that includes investments that react differentl# to the same economic factors. 1t:s a strateg# known as asset allocation. This generall# involves investing in both bonds and stocks or the funds that own them! alwa#s holding some of each. That:s because historical patterns show that when bonds as a groupNthough not ever# bondNare providing a strong return! stocks on the whole tend to provide a disappointing return. The reverse is also true.
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<onds tend to provide strong returns! measured b# the combination of change in value and investment earnings! when investor demand for them increases. That demand ma# be driven b# concerns about volatilit# risk in the stock marketNwhat:s sometimes described as a flight to safet#N or b# the potential for higher #ield that results when interest rates increase! or b# both factors occurring at the same time. That is! when investors believe the# can benefit from good returns with less risk than the# would be exposed to b# owning stock! the# are willing to pa# more than par value to own bonds. 1n fact! the# ma# sell stock to invest in bonds. The sale of stock combined with limited new bu#ing drives stock prices down! reducing return. 1n a different phase of the c#cle! those same investors might sell off bonds to bu# stock! with just the opposite effect on stock and bond prices. 1f we owned both bonds and stocks in both periods! we would benefit from the strong returns on the asset class that was in greater demand at an# one time. "e would also be read# when investor sentiment changes and the other asset class provides stronger returns. To manage s#stematic risk! we can allocate our total investment portfolio so that it includes some stock and some bonds as well as some cash investments.

No sys$!.&$"+ R"s, Dons#stematic risk! in contrast to s#stematic risk! affects a much smaller number of companies or investments and is associated with investing in a particular product! compan#! or industr# sector. 'ere are some examples of non s#stematic risk+

M& &(!.! $ '"s,! also known as compan# risk! refers to the impact that bad management decisions! other internal missteps! or even external situations can have on a compan#:s performance and! as a conse0uence! on the value of investments in that compan#. *ven if we research a compan# carefull# before investing and it appears to have solid management! there is probabl# no wa# to know that a competitor is about to bring a superior product to market. Dor is it eas# to anticipate a financial or personal scandal
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that undermines a compan#:s image! its stock price! or the rating of its bonds.

C'!d"$ '"s,! also called default risk! is the possibilit# that a bond issuer won:t pa# interest as scheduled or repa# the principal at maturit#. /redit risk ma# also be a problem with insurance companies that sell annuit# contracts! where our abilit# to collect the interest and income we expect is dependent on the claims pa#ing abilit# of the issuer.

4ne wa# to manage nons#stematic risk is to spread our investment dollars around! diversif#ing our portfolio holdings within each major asset classNstock! bonds! and cashNeither b# owning individual securities or mutual funds that invest in those securities. "hile we:re likel# to feel the impact of a compan# that crashes and burns! it should be much less traumatic if that compan#:s stock is just one among several we own.

O$h!' I #!s$.! $ R"s,s The investment decisions we makeNand sometimes those we avoid makingNcan expose we to certain risks that can impede our progress toward meeting our investment goals. 6or example! bu#ing and selling investments in our accounts too fre0uentl#! perhaps in an attempt to take advantage of short term gains or avoid short term losses! can increase our trading costs. The mone# we spend on trading reduces the balance in our account or eats into the amount we have to invest. 1f we decide to invest in something that:s receiving a lot of media attention! we ma# be increasing the possibilit# that we:re bu#ing at the market peak! setting up for future losses. 4r! if we sell in a sudden market downturn! it can mean not onl# locking in our losses but also missing out on future gains. "e can also increase our investment risk if we don:t monitor the performance of our portfolio and make appropriate changes. 6or example! we should be aware of investments that have failed to live up to our expectations! and shed them when we determine that the# are unlikel# to improve! using the mone# from that sale for another investment.

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Co +!1$ o) R!$u' s o " #!s$.! $

R*T%RD(+ I major purpose of investment is to set a return of i n c o m e o n t h e f u n d s invested. 4n a bond an investor expects to receive interest. 4n a stock! dividends ma# be anticipated. The investor ma# expect capital gains from some investments and rental income from house propert#.

F&+$o's &))!+$" ( '!$u' s o " #!s$.! $The rate of return on an investment asset is the income and capital appreciation over a measurement period divided b# the cost of ac0uisition! expressed as a percentage. Issets include stocks! bonds! real estate and mutual funds. The rates of return depend on several factors! such as the portfolio composition and macroeconomic conditions! and determine the extent to which investors can meet their financial objectives. 9> Ass!$ M"3The asset mix of an investment portfolio determines its overall return. There is a risk return tradeoff with ever# asset the higher the risk! the higher the volatilit# and return potential. 6or example! stocks are generall# riskier and more volatile than bonds! but the rates of return on stocks have exceeded those of bonds over the long term. In investment portfolio full# invested in stocks is likel# to suffer in a down econom# and during periods of high market volatilit#. 4n the other hand! a conservative portfolio invested mainl# in high 0ualit# bonds is likel# to have lower but more predictable and stable returns. ;> Fu d&.! $&lsThe strategic and operational fundamentals of the underl#ing businesses affect investment returns. (trateg# involves positioning a compan# to take advantage of opportunities and responding effectivel# to competitive threats. 4perational execution involves managing costs! expanding into new markets and continuall# innovating to sta# ahead of the competition.
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/ompanies that consistentl# meet sales and profit expectations generall# see their stock prices outperform market averages. /onversel#! companies that lose market share and miss earnings expectations underperform the market. <> E+o o.y.acroeconomic conditions affect investment rates of return. I growing econom# means that more people have jobs! which means the# spend more. 6or businesses! this leads to increases in sales! profits and investments in new emplo#ees and e0uipment. 'owever! rapid economic growth can lead to higher interest rates. This makes credit more expensive! thus dampening consumer spending and business investments. *conomic slowdowns lead to low emplo#ment! which usuall# means lower profits and stock prices. The resulting weakness in the stock markets could improve bond prices as investors move funds to the relative safet# of bonds. => O$h!'6iscal polic#! regulations and political stabilit# also affect investment rates of return. Garge fiscal deficits reduce government flexibilit# and ma# result in higher borrowing costs for businesses. In arduous regulator# approval process can hamper business investments in the resource and energ# sectors. Eolitical stabilit# creates investor and business confidence because there is more visibilit# into possible investment returns. 1nvestors tend to avoid countries that change governments fre0uentl# or have civil strife.

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R!l&$"o sh"1 /!$-!! '"s, & d '!$u' s " " #!s$.! $

Risk and return are directl# related. The greater the risk of the investment! the greater the potential return from that investment. /onversel#! with ver# safe! low risk investments! the return will likel# be low. The basic principle is this+ To be willing to accept the risk that an investment could do poorl#! investors must be compensated with the potential for greater return.

M!&su'" ( 0o'$)ol"o R"s,s 4ne of the concepts used in risk and return calculations is standard deviation which measures the dispersion of actual returns around the expected return of an investment. (ince standard deviation is the s0uare root of the variance! this is another crucial concept to know. The variance is calculated b# weighting each possible dispersion b# its relative probabilit# ,take the difference between the actual return and the expected return! then s0uare the number-. The standard deviation of an investment:s expected return is considered a basic measure of risk. 1f two potential investments had the same expected return! the one with the lower standard deviation would be considered to have less potential risk. R"s, M!&su'!s There are three other risk measures used to predict volatilit# and return+

Al1h& - this measures stock price volatilit# based on the specific characteristics of the particular securit#. Is with beta! the higher the number! the higher the risk. Sh&'1! '&$"o- this is a more complex measure that uses the standard deviation of a stock or portfolio to measure volatilit#. This calculation measures the incremental reward of assuming incremental risk. The larger the (harpe ratio! the greater the potential return. The formula is+ (harpe Ratio P ,total return minus
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the risk free rate of return- divided b# the standard deviation of the portfolio.

B!$& - this measures stock price volatilit# based solel# on general market movements. T#picall#! the market as a whole is assigned a beta of 1.9. (o! a stock or a portfolio with a beta higher than 1.9 is predicted to have a higher risk and! potentiall#! a higher return than the market. /onversel#! if a stock ,or fund- had a beta of .@>! this would indicate that if the market increased b# 198! this stock ,or fund- would likel# return onl# @.>8. 'owever! if the market dropped 198! this stock would likel# drop onl# @.>8.

Ass!$ Allo+&$"o 1n simple terms! asset allocation refers to the balance between growth oriented and income oriented investments in a portfolio. This allows the investor to take advantage of the riskCreward tradeoff and benefit from both growth and income. 'ere are the basic steps to asset allocation+ 1. /hoosing which asset classes to include ,stocks! bonds! mone# market! real estate! precious metals! etc.2. (electing the ideal percentage ,the target- to allocate to each asset class 3. 1dentif#ing an acceptable range within that target =. Fiversif#ing within each asset class R"s, Tol!'& +! The client:s risk tolerance is the single most important factor in choosing an asset allocation. It times! there ma# be a distinct difference between the risk tolerance of a client and hisCher spouse! so care must be taken to get agreement on how to proceed. Ilso! risk tolerance ma# change over time! so it:s important to revisit the topic periodicall#. T".! Ho'"7o /learl#! the time horizon for each of the client:s goals will affect the asset allocation mix. Take the example of a client with a ver# aggressive risk tolerance. The recommended allocation to stocks will be much higher for the client:s retirement portfolio than for the mone# being set aside for the college fund of the client:s 13 #ear old child.
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Chapter Accessing and managing the risk

1t:s one thing to know that there are risks in investing. <ut how do we figure out ahead of time what those risks might be! which ones we are willing to take! and which ones ma# never be worth takingM There are three basic steps to assessing risk+

%nderstanding the risk posed b# certain categories of investments Fetermining the kind of risk we are comfortable taking *valuating specific investments

"e can follow this path on our own or with the help of one or more investment professionals! including stockbrokers! registered investment advisers! and financial planners with expertise in these areas.

S$!1 9* D!$!'." " ( $h! R"s, o) & Ass!$ Cl&ss The first step in assessing investment risk is to understand the t#pes of risk a particular categor# or group of investmentsNcalled an asset class Nmight expose we to. 6or example! stock! bonds! and cash are considered separate asset classes because each of them puts our mone# to work in different wa#s. Is a result! each asset class poses particular risks that ma# not be characteristic of the other classes. 1f we understand what those risks are! we can generall# take steps to offset those risks.

S$o+,?<ecause shares of stock don:t have a fixed value but reflect changing investor demand! one of the greatest risks we face when we invest in stock is volatilit#! or significant price changes in relativel# rapid succession. 1n fact! in some cases! we must be prepared for stock prices to move from hour to hour and even from minute to minute. 'owever! over longer periods! the short term fluctuations tend to smooth out to show a gradual increase! a gradual decrease! or a basicall# flat stock price.
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6or example! if a stock we bought for O2> a share dropped O> in price in the following week because of disappointing news about a new product! we suffered a 298 loss. 1f we had purchased 299 shares at a cost of O>!999! our investment would now be worth just O=!999. 1f we sold at that pointNand there might have been good reason to do soNwe would have lost O1!999! plus whatever transaction fees we paid. "hile some gains or losses of value seem logical! others ma# not! as ma# be the case when a compan# announces increased earnings and its stock price drops. 1f we have researched the investment before we made it and believe that the compan# is strong! we might hold on to the stock. 1n that case! we might be rewarded down the road if the investment then increases in value and perhaps pa#s dividends as well. "hile positive results aren:t guaranteed! we can learn to anticipate when patience is likel# to pa# off.

Bo ds?<onds have a fixed valueNusuall# O1!999 per bondNor what is known as par or face value. 1f we hold a bond until maturit#! we will get that amount back! plus the interest the bond earns! unless the issuer of the bond defaults! or fails to pa#. 1n addition to the risk of default! we also face potential market risk if we sell bonds before maturit#. 6or example! if the price of the bonds in the secondar# marketNor what other investors will pa# to bu# themNis less than par! and we sell the bonds at that point! we ma# realize a loss on the sale. The market value of bonds ma# decrease if there:s a rise in interest rates between the time the bonds were issued and their maturit# dates. 1n that case! demand for older bonds pa#ing lower rates decreases. 1f we sell! we must settle for the price we can get and potentiall# take that loss. .arket prices can also fall below par if the bonds are downgraded b# an independent rating agenc# because of problems with the compan#:s finances. (ome bonds have a provision that allows the issuer to LcallL the bond and repa# the face value of the bond to we before its maturit#. 4ften there is a set Lcall date!L after which a bond issuer can pa# off the bond. "ith these bonds! we might not receive the bond:s original coupon rate for the bond:s entire term. 4nce the call date has been reached! the stream of a callable bond:s interest pa#ments is uncertain! and an# appreciation in the market value of the bond ma# not rise above the call price. These risks are part of
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call risk. (imilar to when a homeowner seeks to refinance a mortgage at a lower rate to save mone# when loan rates decline! a bond issuer often calls a bond after interest rates drop! allowing the issuer to sell new bonds pa#ing lower interest ratesNthus saving the issuer mone#. The bond:s principal is repaid earl#! but the investor is left unable to find a similar bond with as attractive a #ield. This is known as reinvestment risk.

C&sh?The primar# risk we face with cash investments! including %.(. Treasur# bills and mone# market mutual funds! is losing ground to inflation. 1n addition! we should be aware that mone# in mone# market funds usuall# is not insured. "hile such funds have rarel# resulted in investor losses! the potential is alwa#s there.

4ther asset classes! including real estate! pose their own risks! while investment products! such as annuities or mutual funds that invest in a specific asset class! tend to share the risks of that class. That means that the risk we face with a stock mutual fund is ver# much like the risk we face with individual stock! although most mutual funds are diversified! which helps to offset nons#stematic risk.

S$!1 ;* S!l!+$" ( R"s, The second step is to determine the kinds of risk we are comfortable taking at a particular point in time. (ince it:s rarel# possible to avoid investment risk entirel#! the goal of this step is to determine the level of risk that is appropriate for we and our situation. 4ur decision will be driven in large part b#+

4ur age 4ur goals and our timeline for meeting them 4ur financial responsibilities 4ur other financial resources

Ige is one of the most important issues in managing investment risk. 1n general! the more investment risk we can afford to take. The reason is simple+ "e have more time to make up for an# losses we might suffer in the short term.
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"e can use recent histor# to illustrate the validit# of this point. (uppose two people! one 39 and the other 79! had been similarl# invested in 4ctober 299? in portfolios overloaded with stocks. <# .arch 299A! both would almost certainl# have lost substantial amounts of mone#. <ut while the person has perhaps 3> #ears to recover and accumulate investment assets! the older person ma# be forced to dela# retirement. 4n the other hand! having a long time to recover from losses doesn:t mean we can ignore the importance of managing risk and choosing investments carefull# and selling them when appropriate. The more stock and stock fundsNboth mutual funds and exchange traded fundsNwe might consider bu#ing. <ut stock in a poorl# run compan#! a compan# with massive debt and noncompetitive products! or a compan# whose stock is wildl# overpriced! probabl# isn:t a good investment from a risk management perspective! no matter how old we are. Is we get closer to retirement! managing investment risk generall# means moving at least some of our assets out of more volatile stock and stock funds into income producing e0uities and bonds. Fetermine what percentage of our assets we want to transfer! and when. That wa# we won:t have more exposure to a potential downturn than we:ve prepared for. The consensus! though! is to include at least some investments with growth potential ,and therefore greater risk to principal- after we retire since we:ll need more mone# if we live longer than expected. "ithout growth potential! we:re vulnerable to inflation. Qeep in mind that our attitude toward investment risk ma#Nand probabl# shouldNchange over time. 1f we are the primar# source of support for a number of people! we ma# be willing to take less investment risk than we did when we were responsible for just our self. 1n contrast! the larger our investment base! the more willing we ma# be to take added risk with a portion of our total portfolio. 1n a worst case scenario! we could manage without the mone# we lost. Ind if our calculated risk pa#s off! we ma# have even more financial securit# than we had before. .an# people also find that the more clearl# the# understand how investments work! the more comfortable the# feel about taking risk.

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S$!1 <* E#&lu&$" ( S1!+")"+ I #!s$.! $s The third step is evaluating specific investments that we are considering within an asset class. There are tools we can use to evaluate the risk of a particular investmentNa process that makes a lot of sense to follow both before we make a new purchase and as part of a regular reassessment of our portfolio. 1t:s important to remember that part of managing investment risk is not onl# deciding what to bu# and when to bu# it! but also what to sell and when to sell it. 6or stocks and bonds! the place to start is with information about the issuer! since the value of the investment is directl# linked to the strength of the compan#Nor in the case of certain bonds! the government or government agenc#Nbehind them.

Co.1& y Do+u.! $s?*ach public compan# must register its securities with the (ecurities and *xchange /ommission ,(*/and provide updated information on a periodic basis. !The annual report on 6orm 19 Q contains audited financial statements as well as a wealth of detailed information about the compan#! the people who run it! the risks of investing in the compan#! and much more. /ompanies also submit to the (*/ three additional 0uarterl# reports called 19 Rs and interim reports on 6orm @ Q. "e can access these compan# filings using the (*/:s *FBIR database. "hile the# aren:t alwa#s exciting reading! (*/ filings can be a treasure trove of information about a compan#. "hen we:re reading a compan#:s financial statements! don:t skip over the footnotes. The# often contain red flags that can alert we to pending lawsuits! regulator# investigations! or other issues that could have a negative impact on the compan#:s bottom line. The compan#:s prospectus! especiall# the risk factors section! is another reliable tool to help we evaluate the investment risk of a newl# issued stock! an individual mutual fund or exchange traded fund! or a R*1T ,real estate investment trust-. The investment compan# offering the mutual fund! *T6! or R*1T must update its prospectus ever# #ear! including an evaluation of the level of risk we are taking b# owning that particular investment. "e:ll also want to look at how the fund! *T6! or R*1T has done in the past! especiall# if it has been around long enough to have weathered a
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full economic c#cle of market ups and downsNwhich might be as long as 19 #ears. Qeep in mind! however! that past results cannot predict future performance. Ilso verif# that mutual fund managers have not changed. 1n activel# managed funds! it is the managers: picks that determine returns and the level of risk the fund assumes. East returns would not reflect a new manager3s performance.

R&$" ( S!'#"+!s?1t:s important to check what one or more of the independent rating services has to sa# about specific corporate and municipal bonds that we ma# own or ma# be considering. *ach of the rating companiesNincluding I... <est /ompan#! 1nc.; Fominion <ond Rating (ervice Gtd. ,also known as F<R( Gtd.-; *gan Hones Rating /ompan#; 6itch! 1nc.; Hapan /redit Rating Igenc#! Gtd.; GI/* 6inancial /orp.; .ood#3s 1nvestors (ervice; Rating and 1nvestment 1nformation! 1nc.; Realpoint! GG/ ,which focuses on commercial mortgage backed securities-; and (tandard S Eoor3s Ratings (ervicesNevaluates the issuing compan# a little differentl#! but all of them are focused on the issuer:s abilit# to meet its financial obligations. The higher the letter grade a rating compan# assigns! the lower the risk we are taking. <ut remember that ratings aren:t perfect and can:t tell we whether or not our investment will go up or down in value. Ilso remember that managing investment risk doesn:t mean avoiding risk altogether. There might be times when we include a lower rated bond or bond fund in our portfolio to take advantage of the higher #ield it can provide. Research companies also rate or rank stocks and mutual funds based on specific sets of criteria. <rokerage firms that sell investments similarl# provide their assessments of the probable performance of specific e0uit# investments. <efore we rel# on ratings to select our investments! learn about the methodologies and criteria the research compan# uses in its ratings. "e might find some research companies: methods more useful than others:.

T&,! & B'o&d V"!"hile the past performance of an investment never guarantees what will happen in the future! it is still an important tool. 6or example! a historical perspective can alert we to the kinds of losses we should be prepared for
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Nan awareness that:s essential to managing our risk. I sense of the past can also tell we which asset class or classes have provided the strongest return over time and what their average returns are. Inother wa# to assess investment risk is to sta# tuned to what:s happening in the world around we. 6or example! investment professionals who learn that a compan# is being investigated b# its regulator ma# decide it:s time to unload an# of its securities that their clients own or that the# hold in their own accounts. (imilarl#! political turmoil in a particular area of the world might increase the risk of investing in that region. "hile we don:t want to overreact! we don:t want to take more risk than we are comfortable with.

I #!s$" ( $o M" "."7! R"s, "hile some investors assume a high level of risk b# going for the goldN or looking for winnersNmost people are interested in minimizing risk while realizing a satisfactor# return. 1f that:s our approach! we might consider two basic investment strategies+ asset allocation and diversification.

Us" ( Ass!$ Allo+&$"o "hen we allocate our assets! we decideNusuall# on a percentage basisN what portion of our total portfolio to invest in different asset classes! usuall# stock! bonds! and cash or cash e0uivalents. "e can make these investments either directl# b# purchasing individual securities or indirectl# b# choosing funds that invest in those securities. Is we build a more extensive portfolio! we ma# also include other asset classes! such as real estate! which can also help to spread out our investment risk and so moderate it. Isset allocation is a useful tool in managing s#stematic risk because different categories of investments respond to changing economic and political conditions in different wa#s. <# including different asset classes in our portfolio! we increase the probabilit# that some of our investments will provide satisfactor# returns even if others are flat or losing value. Eut another wa#! we:re reducing the risk of major losses that can result from
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over emphasizing a single asset class! however resilient we might expect that class to be. 6or example! in periods of strong corporate earnings and relative stabilit#! man# investors choose to own stock or stock mutual funds. The effect of this demand is to drive stock prices up! increasing their total return! which is the sum of the dividends the# pa# plus an# change in value. 1f investors find the mone# to invest in stock b# selling some of their bond holdings or b# simpl# not putting an# new mone# into bonds! then bond prices will tend to fall because there is a greater suppl# of bonds than of investors competing for them. 6alling prices reduce the bonds: total return. 1n contrast! in periods of rising interest rates and economic uncertaint#! man# investors prefer to own bonds or keep a substantial percentage of their portfolio in cash. That can depress the total return that stock provides while increasing the return from bonds. "hile we can recognize historical patterns that seem to indicate a strong period for a particular asset class or classes! the length and intensit# of these c#clical patterns are not predictable. That:s wh# it:s important to have mone# in multiple asset classes at all times. "e can alwa#s adjust our portfolio allocation if economic signs seem to favor one asset class over another. 6inancial services companies make adjustments to the asset mix the# recommend for portfolios on a regular basis! based on their assessment of the current market environment. 6or example! a firm might suggest that we increase our cash allocation b# a certain percentage and reduce our e0uit# holdings b# a similar percentage in a period of rising interest rates and increasing international tension. /ompanies fre0uentl# displa# their recommended portfolio mix as a pie chart! showing the percentage allocated to each asset class. .odif#ing our asset allocation modestl# from time to time is not the same thing as market timing! which t#picall# involves making fre0uent shifts in our portfolio holdings in anticipation of which wa# the markets will turn. <ecause no one knows what will happen! this techni0ue rarel# produces positive long term results.

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Us" ( D"#!'s")"+&$"o "hen we diversif#! we divide the mone# we:ve allocated to a particular asset class! such as stocks! among various categories of investments that belong to that asset class. These smaller groups are called subclasses. 6or example! within the stock categor# we might choose subclasses based on different market capitalizations+ some large companies or funds that invest in large companies! some mid sized companies or funds that invest in them! and some small companies or funds that invest in them. "e might also include securities issued b# companies that represent different sectors of the econom#! such as technolog# companies! manufacturing companies! pharmaceutical companies! and utilit# companies. (imilarl#! if we:re bu#ing bonds! we might choose bonds from different issuersNthe federal government! state and local governments! and corporationsNas well as those with different terms and different credit ratings. Fiversification! with its emphasis on variet#! allows we to manage nons#stematic risk b# tapping into the potential strength of different subclasses! which! like the larger asset classes! tend to do better in some periods than in others. 6or example! there are times when the performance of small compan# stock outpaces the performance of larger! more stable companies. Ind there are times when small compan# stock falters. (imilarl#! there are periods when intermediate term bondsN%.(. Treasur# notes are a good exampleNprovide a stronger return than short or long term bonds from the same issuer. Rather than tr#ing to determine which bonds to bu# at which time! there are different strategies we can use. 6or example! we can bu# bonds with different terms! or maturit# dates. This approach! called a barbell strateg#! involves investing roughl# e0uivalent amounts in short term and long term bonds! weighting our portfolio at either end. That wa#! we can limit risk b# having at least a portion of our total bond portfolio in whichever of those two subclasses is providing the stronger return. Ilternativel#! we can bu# bonds with the same term but different maturit# dates. %sing this strateg#! called laddering! we invest roughl# e0uivalent amounts in a series of fixed income securities that mature in a rolling pattern! perhaps ever# two #ears. 1nstead of investing O1>!999 in
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one note that will mature in 19 #ears! we invest O3!999 in a note maturing in two #ears! another O3!999 in a note maturing in four #ears! and so on. This approach helps we manage risk in two wa#s+

1f rates drop just before the first note matures! we:ll have to invest onl# O3!999 at the new lower rate rather than the full O1>!999. 1f rates behave in traditional fashion! the# will t#picall# go up again at some point in the ten #ear span covered b# our ladder. 1f we need mone# in the short term for either a planned or unplanned expense! we could use the amount of the maturing bond to meet that need without having to sell a larger bond in the secondar# market.

M!&su'" ( R"s, "e can:t measure risk b# putting it on a scale or lining it up against a #ardstick. 4ne wa# to put the risk of a particular investment into context Ncalled the risk premium in the case of stock or the default premium in the case of bondsNis to evaluate its return in relation to the return on a risk free investment. 1s there actuall# a risk free investmentM The one that comes closest is the 13 week %.(. Treasur# bill! also referred to as the A1 da# bill. This investment serves as a benchmark for evaluating the risk of investing in stock for two reasons+

The shortness of the term! which significantl# reduces reinvestment risk. The backing of the %.(. government! which virtuall# eliminates default! or credit risk

The long term Treasur# bond is the risk free standard for measuring the default risk posed b# a corporate bond. "hile both are vulnerable to inflation and market risk! the Treasur# bond is considered free of default risk.

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Conclusion

The investor! while making investment has to face various t#pes of risks associated with those transactions. 'e has to understand and manage the risks properl# to maximize his returns. I clear perception of risk is necessar# to have control over them. Risk is a potential loss a portfolio is likel# to suffer. Is most losses proceed from ignorance! the# could be avoided b# understanding them properl#. Risk management aims at understanding and identif#ing the risks an investor has to face. 6uture return is an expected return and ma# or ma# not be actuall# realized. Risk management measures the probabilities that ma# arise in particular investment. 1t can show the strengths and weaknesses of the investment.

The emphasis of risk management is increasing with globalization and economic liberalization process altering the wa# risks are perceived. The competitive market scenario and progressive opening up of econom# leading to global linkages point to multiplicit# of risk and risk management. The investors now have to explicitl# identif# and deal with all the risk components! as investors have to be accountable to themselves in terms of risk return implications of their behavior.

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BIBLIOGRA0HY T 1nvesting management b# Euthi (ingh T (ecurit# anal#sis and portfolio management b# Eunthvath# Eandi#am TD(*india.com T1nvestopedia.com TBlossar#.reuters.com T/apitalmarket.com TInswers.com

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