UNIT 2 : EVALUATION OF RISK

A] Evaluation of Organisation’s ability to bear Risk

Risk taking refers specifically to the active assumption of incremental risk in order to
generate incremental gains
Thus, risk-taking can be thought of as an opportunity to earn rewards. There is a trade-off
between risk and reward. In simple words ,greater the risk taken , greater is the reward
expected. However , one must consider the variability of the expected rewards.
The main objective of companies is to maximize their shareholder’s wealth. A company
cannot do this without taking some amount of risk. Hence , it will choose a level of risk
consistent with that objective.
A company with too much risk will face many financial & other difficulties which may be
damaging . On the other hand , a company which takes very little risk may hardly be
generating any value or profits for its shareholders . Thus, companies are required to take
some risks in order to generate profits.
Foll. Factors are to be considered for evaluation of organisation’s ability to bear risk :
i] Risk Appetite & Tolerance
It is the level of risk and uncertainty an organization is prepared and willing to accept.
ii] Risk Culture & Risk Attitude
It is the values ,traditions , behavior in the organization which guides the risk decisions of
management. [eg .Conservative attitude vs Aggressive Attitude ]
Iii] Others
Risk Target , which is the level of risk which is optimal for achieving targets and Risk
Capacity ,which is the level of risk an organization can actually bear.eg.An established
company has higher capacity compared to a Start-up.
B] Identify & Assess The Impact upon the stakeholders involved in Business risk
A stakeholder is a person who has something to gain or lose thru the outcomes of a
planning process. They have an interest in a company and can either affect or be affected
by the business.
The Primary Stakeholders in a company are its Investors ,Employees, Customers , Creditors ,
Govt. ,Society
Stakeholders can be Internal or External. Internal Stakeholders are those whose interest in
a company comes thru a direct relationship such as ownership ,investment or employment.
External Stakeholders are those who do not directly work with a company but are affected
in some way by actions & outcomes of its business.eg. Creditors ,Govt. , Society .
A technique to help identify which individuals to include in our program is known as “
Stakeholder Analysis”
Egs of Stakeholders & their Interests are as follows:
i]Owners- Profits, Market Standing/Reputation ,Growth ,Social Goals
ii]Investors – ROI ,Incomes
iii]Employees – Job Security ,Pay Scales ,Respect ,Communication
iv] Customers – Value ,Quality , Customer Care ,Ethical Products
v] Creditors – Credit Score , Liquidity
Responding To Stake holders Expectations :
Stakeholder Management is essentially stakeholder relationship management .Some of its
main Principles are:
i] Managers should actively monitor the concerns of all shareholders & take their interests
into account for decision-making & operations.
Ii] Managers should listen to & openly communicate with stakeholders about their concerns
,contributions, & risks they take.
Iii] Managers should adopt processes behavior that are sensitive to the concerns &
capabilities of each stakeholder.
Iv] Managers should recognize the inter-dependence of efforts & rewards among
stakeholders taking into account their risks & ensuring fair distribution of benefits and
rewards among them.
v] Managers should work cooperatively with the activities to ensure risks & damages are
minimized , if not completely removed .
vi] Managers should avoid activities that might be detrimental to human rights.
Vii] Managers should acknowledge the potential conflicts between their own role & their
legal responsibilities.
Different Stakeholders And Their Concerns And Risks
i] Owners & Investors
They are concerned with profits & wealth maximization. Management should focus on
increasing ROI & also take care of regulations for companies long term growth.
Ii] Employees
They are concerned about salaries ,job security ,transparency ,truthfulness . Thru proper HR
Policy ,employees are updated about major developments and also their earnings policies.
Iii] Customers
They expect quality service & adequate customer care. A separate Customer care
Department can take care of these needs.
Iv] Suppliers /Creditors
They are concerned with timely payments .In case of any delays in payments, creditors
need to be informed in advance .
v] Community/Society
They are concerned with environment protection ,social welfare . Companies should fulfill
CSR [ Corporate Social Responsibility] without any expectations and hesitations.
vi] Government
Their main concern is that the company is fulfilling its tax liabilities . This can be addressed
thru proper tax laws and a qualified team.

C] Risk Measurement
Managing risk is about making the strategic decisions to control those risks that should be
controlled & to exploit those opportunities that can be exploited .
-Risk Measurement is required to support Risk Management
-Risk Measurement is the special task of quantifying & communicating risk.
-Risk Measurement has 3 important goals :
i] Uncovering known risks faced by the firm. Known risk can be identified & understood
with study and analysis
ii]Making known risks easy to see , understood & compare.
Iii] Understand & uncover unknown and unanticipated risks.
-Risk Measurement requires specialized people with expertise.
Different Measures of Risk
i] Standard Deviation & variance
-Std. Dev. Is used by investors to measure the risk of a portfolio or a security
-Std. Dev. & variance are a measure of volatility .The more a stock’s return varies from its
average return ,the more volatile [risky] is the stock
-Variance is total of squared deviation of each possible return from expected return
multiplied by its probability and std. dev. Is the square root of variance.
Ii] Beta
-Beta is a measure to calculate the market risk of a security.
-Beta is a measure of the volatility ,systematic risk of a security/portfolio in comparison to
the market as a whole.
-A Beta of 1 indicates that the security’s price moves with the market
-A Beta of less than 1 indicates that the security is less volatile than the market.
-Beta of more than 1 indicates that the security is more volatile than the market.
-Aggressive portfolios generally have a beta greater than 1 . These are suitable for investors
ready to take high risk to earn high returns.
-Defensive Portfolios have Beta less than 1 and are suitable for investors who are risk
averse.
iii] VaR : [Value At risk]
-It refers to maximum loss on a given asset over a given period of time at a given
confidence level.
-VaR is one of the most widely used technique in stock exchanges worldwide to manage
credit risk
-VaR is calculated at a suitable confidence level for eg. 95% , 99% etc.
-In India ,stock exchanges calculate VaR margins to cover the largest loss that can be
encountered.
- VaR involves using historical data on market prices , current portfolio position , historical
volatility [measured generally as std. dev.]
These inputs are then combined to calculate loss at a particular confidence level.
Eg. A security with VaR of 10% at 95% level of confidence and market price of security is
Rs.100
This implies : Probability that security will fall in value by more than Rs.10[ 100 * 10%] in a
single day is 5% [100-95]

Quantitative Risk Measurement

Every investment involves some risk & the amount of this risk will impact the returns the
investor expects.
The greater the risks ,the greater will be the investor’s required rate of return.
Quantitative Risk Measurement attempts to assign a numerical rating to the risk.
Following are the tools & methods for Quantitative Risk Measurement :
Method 1 : Sensitivity Analysis
It refers to change in output with every change in input variables. In terms of financial
assets ,input variables can be any internal or external factors that affects the performance
of that financial asset.
Method 2 : Expected Monetary Value Analysis
To calculate expected monetary value we need to :
i] Assign probability of occurrence for the risk
ii] Assign monetary value of impact of risk when it occurs
iii] Multiply Step i * Step ii
Method 3: Decision Tree Analysis
This is in the form of a flow chart and each end is represented by a rectangle which contains
a description of the risk and its cost. All the rectangles are linked together with arrows.
Calculating Expected Monetary Value by using Decision Tree is a recommended Technique
and Tool for Quantitative Risk Measurement.
There are some other methods which are also used such as Simulation & Modeling in which
processes generating thousands of outcomes and a probability distribution is generated.
Another method used is Expert Judgement in which experts review the data etc.
Limitations Of Quantitative Risk Measurement
i] Methods used for calculation are complex and only experts and professionals can
understand them.
ii] There are no standards and universally accepted information for implementing the
methods.
Iii] They may not include all the risks .These models at times fail to properly assess the
unexpected sensitivity which some financial assets have.
Iv] The process takes a long time ,since lots of data is to be gathered & compiled.
v] Quantitative Models are mostly dependent upon historical data which may not give an
accurate future picture.
vi] An Automatised Tool such as computers and relevant programs are required to
implement them ,since the calculations are complex
vii] Extreme events are often not captured by these methods since they are rare and hard
to predict.
D] Financial Risk
a] Nature and Importance of Financial Risk
Financial Risk is a result of excessive loans and borrowed funds . If the company takes large
amount of loans ,it has to pay a huge amount of fixed interest ,irrespective of whether
there is any profit or loss. It also includes loan defaults.
Thus ,Financial Risk is classified into 4 main categories [ Market Risk, Credit Risk,Liquidity
Risk, Operational Risk] :
i] Market Risk
It is the risk of changing market conditions such as Equity ,Forex , Interest Rate .It is caused
due to factors such as changes in customer preferences ,availability of cheaper and superior
substitutes etc.
ii] Credit Risk/Default Risk
It arises due to lack of timely payments by borrowers ,customers etc.
iii] Liquidity Risk
A given security /asset cannot be traded quickly , and it is difficult to convert it into cash or
traded at a loss if money is required urgently.
iv] Operational Risk
Risks arising from routine business activities eg. Frauds ,Legal Cases etc
b] Evaluation and Measuring of Financial Risk
Various methods used for measurement of Credit Risk are [Credit rating,Expert System,
Ratio Analysis]:
i] Credit Rating
Credit Ratings are assigned to firms by Credit Rating Agencies [CRA]
CRAs take into consideration factors such as financial performance of firm ,promoter’s track
record ,defaults etc. These credit ratings are used by banks, Financial institutions ,investors
to analyse company’s debt repaying capacity.
ii] Expert System
This system analyses 5 ‘Cs’ of credit related to borrowers :
a] Character - Reputation , and past repayment record.
b] Capital – Ratio of Own Fund to borrowed fund. It indicates probability of going bankrupt
i.e When Borrowed Capital > Own Funds
c] Capacity – Ability to repay i.e Earnings are stable ,not volatile
d] Collateral – Higher the market value of collateral given ,lower is the risk
e] Cycle [Economic] – Industries in a cycle i.e seasonal ,economic developments
eg. Cements[Infrastructure ] when economy is growing , Woolens in winter
iii] Ratio Analysis
Leverage Ratios determine the ability of a firm to pay interest on time and also repayment
of principal. Following are some common ratios used :
Debt Equity Ratio= Debt /Equity
Interest Coverage Ratio= EBIT/Interest
c] Managing Financial Risk
i] Market Risk
Making a Global Portfolio can help in eliminating market risk. Also ,companies can reduce
this risk by diversifying their products /market
ii] Liquidity Risk
a] Storing Liquidity – Keeping Cash Reserves ,money market instruments
b] Liquidity Insurance – An agreement with another party to provide cash at a pre-
fixed rate
c] Limited Exposure to Illiquid Assets– Setting a limit to investing in illiquid assets
d] Investing in Open ended Funds – So that money can be withdrawn whenever
required without any lock-in period.
e] Trading in ETFs – ETFs are easily traded ,since liquidity is high
Iii] Operational Risk
Business can be properly insured, diversified to reduce this risk.
iv] Credit Risk Management
[Risk based Pricing, Use of Derivatives,Diversification, Covenants]
a] Risk Based Pricing
It involves deciding interest rates depending on each case. Borrowers who have higher
chances of defaulting are charged higher rates of interest.
b] Use of Derivatives
Lenders can use credit derivatives to hedge their risk. These credit derivatives transfer risk
from lender to seller of these derivatives in exchange for payment.
Most common credit derivatives are Credit Default Swap[CDS] and Total Return Swap[TRS]
CDS –
It is like buying credit insurance .Lender pays fixed amount to seller i.e Insurer .If borrower
does not default ,no payment is made by insurer/seller has to cover the default loss by
making payment to the lender.
TRS
It is an agreement where lender agrees to pay TRS seller the Annual Rate + Change in
Market value of loan . In return , the lender receives a floating rate [MIBOR]
c] Diversification
Lending to a small number of borrowers increases Credit Risk. Hence ,to diversify , loans
should be given to different types and a number of persons
d] Covenants
Covenants are the conditions written in loan agreements eg. Repayment Terms , Further
Borrowings , Reporting Financial Conditions
E] Managing Business Risk

i] Writing a Business Plan

This helps in measuring ,evaluating and planning for risks. Also list out steps and
procedures to deal with risks identified.
Ii] Obtain necessary insurance coverage
Depending on the nature of business , types business activities ,determine the correct
insurance cover required and obtain the same.
Iii] Train Employees and Staff Members
Training employees to deal with risks and ways to avoid risk can help business to lower
further damage.
Iv] Update & Upgrade Business Plans
Risk is dynamic ,hence plans need to be updated and upgraded regularly.
F] Role of Risk Manager and Risk Committee in Identifying and Managing Risk
-Chief Risk Officer [CRO] is responsible for organizing ,developing and implementing the
process of identifying ,measuring and controlling credit risk , market risk ,operational risk
and liquidity risk.
-CRO collects important information from Risk Team , Financial Controllers , and Operations
Teams .
The CRO is responsible for organizing , developing and implementing the process . He also
prepares periodical reports based on the information received and presents them them to
MDs or CEOs .It is the responsibility of the CRO to ensure that all required actions are taken
and suitably presented to the board in their subsequent meetings.
- Based on feedback received ,CRO takes corrective actions and any loopholes found are
removed.
Risk Commitee :
-Risk Management Committee of a company helps its Board of Directors in fulfilling its
Corporate Governance Responsibilities
- The committee helps to identify ,evaluate and eliminate many risks mainly strategic
,operational ,environmental
-The committee is an independent committee
- The committee has resources and authority to discharge its responsibilities
-Committee helps Board of Directors with regard to Risk Management of the company and
also in its compliance framework

G] Sources and Impact of Common Business Risk

Business Risk refers to the risk whether the company can sustain itself ,earn income and
profits. Business Risk includes following different risks associated with business risks such as
: Market Risk,Credit Risk, Liquidity Risk , Technological Risk ,Legal Risk , Environment Risk
, Reputation Risk ,Country Risk
i] Market Risk[Systematic Undiversified Risk]
It is the risk that the value of the portfolio /business will decrease due to change in certain
factors . Sources of market risk are external and company has no control over it. To
eliminate this risk ,portfolio /investment shoul be global [i.e investment in many
countries/economies]
Market Risk includes Equity Risk ,Interest Rate Risk ,Foreign Exchange Risk ,Commodities
Price Risk
Equity Risk
-It arises due to fluctuations in stock markets
-It can be reduced by diversification or selecting low beta stocks
Interest Rate Risk
It arises due to fluctuations in interest rates in the economy .It affects both ,equity and
bond markets. Interest rate derivatives are used to hedge this risk.Also , diversification
between equity and debt can help reducing it.
Currency Risk
It refers to risk arising from volatility of exchange rate. Currency options and Futures are
used to hedge against this risk.
Commodity Risk
It arises from fluctuations in commodity prices. Commodity futures and options provide
hedge against such risk.

ii] Credit Risk/ Default Risk

Failure or inability to make timely payments for interest ,principal, loans etc is called
Default Risk.This risk can be reduced/hedged using Risk based pricing,use of Derivatives
[CDS & TRS] ,Diversification ,covenants[discussed earlier]

iii] Liquidity Risk

This is the risk that the given security/asset cannot be easily traded. Ways to reduce this
risk are discussed earlier [i.e Storing Liquidity,Liquidity insurance ,Limiting Illiquid
Investments, Open ended Funds and ETFs]

iv] Technological Risk

-Some common sources of this risk are Hardware Failure ,Virus ,Spams ,Hackers ,Human
Errors and Frauds ,Natural Disasters.
-These risks affect the company’s profitability and also reputation
Techniques used to overcome these are :
-Secure computers ,servers
-Using latest antivirus, anti spy software
-Regular data backups ,passwords protection and changing passwords periodically
-Training the staff regarding the policies and procedures.

v] Legal Risk
It is the risk of losses due to regulatory or legal action. The main sources of Legal Risk are :
1] Regulatory Risk :
This is due to changes in regulations and cost of new compliances .
2] Compliance Risk :
Risk of fines and penalties for Non-Compliance
3] Contract Risk:
Risk of company, partner, customer or supplier failing to meet terms of contract.
4] Non-Contractual Rights & Obligations:
Risk of Third party interference
5] Dispute Risk :
Risks of Legal Disputes
6] Reputation Risk:
Reduction of company’s reputation due to legal actions.
Methods to overcome legal risk are :
-Conducting legal audit
-Education and training of staff regarding legal compliances
-Having strong compliance and governance policies
-Employing experienced and qualified staff

vi] Environment Risk

It is the threat to living beings and environment caused by wastes ,emissions ,arising from
company’s activities . The following is the risk of damages :
Brand Reputation , Penalties for violation, damages from faulty materials /processes, Costs
of litigations.
vii] Reputation Risk
-It is the risk to the goodwill and market standing of a company.
-It can also become a threat to the existence of the company and wipe out its
revenues/profits
-It can occur thru the following:
i) Daily actions and operations of the company
ii) Due to actions of employers or employees.
iii) Thru other parties ,partners ,suppliers

viii] Country and Political Risk

-It refers to the political and economic instabilities which affect the securities in a particular
country
- Some of the main sources of country risk are changes in business environment , currency
controls , regulatory changes ,devaluation , events which increase operational risks such as
Riots, War etc.
-Political Risk arises due to political changes /instabilities or sudden changes in policies or
government.
-Political Risk can be avoided by investing in stable and friendly countries.
-MNCs face many hurdles when they operate in a politically unstable country.
Following are some hurdles faced by MNCs :
1. Restrictions on remitting/sending profits to their home country
2. Restrictions on activities eg. Limit to imports , using local raw material
3. Restrictions on employing Foreign Nationals – i.e When Only locals are allowed to be
employed
4. Nationalising Assets of Business – Acquisition of the company’s assets by the government
 Alternative Investment Strategies
Alternative Investment means making investments in products other than the traditional
ones such as Equity ,Bonds , Cash etc.
Alternative Investments are classified as Tangibles and Intangibles
Tangibles = Paintings ,Art, Artifacts etc
Intangibles = 1. Real estate
2. Private Equity
3. Hedge Funds
4. Precious Metals
5. Managed Futures
Features of Alternative Investments :
Main objective of alternative investments is to reduce overall risk thru diversification .
Some of its main features are :
1.They are less liquid compared to stocks and bonds
2. Historical data regarding their Risk and Return is not easily available
3. Cost of purchase or sale may be relatively high
4. It has low degree of correlation with stocks and bonds , hence they are useful for
diversification.

A] Real Estate
The main advantages of real estate are :
i.It has low correlation with stocks, hence helps in diversification
ii.Its returns are relatively high
iii.The returns are higher than inflation ,hence they are a hedge against inflation
-Most widely preferred method of investing in Real Estate is thru Real Estate Investment
Trust [REIT]
-It allows investment either as properties or mortgages
-It is highly liquid since it is traded on major stock exchanges ,and it offers high yields
-Infrastructure Investment Trusts [InvITs] are a type of income trust that exists to finance
,contruct,own,operate and maintain different infrastructure projects in a given region or
area.It helps infrastructure developers to monetize specific assets ,helping them to use the
proceeds for completing their projects which have stopped due to shortage of funds.
Main Features of REIT are:
i.REITs compulsorily have to pay 90% of its taxable income as dividends
ii. 75% of its total investments must be in Real Estate
iii.75% of its gross income should be from Rent or Mortgage Interest
iv. Shares of REIT are fully transferable
v. Minimum 5 members should hold 50% of its shares.
vi. It should have minimum 100 shareholders.

Types of REITs: [Equity,Mortgage,Hybrid]

a.Equity REIT –[Most Common]
-Its main revenue is rent
-It is compulsory to pay regular income to investors
-Good Capital Appreciation
-Investments are in real estate
b.Mortgage REIT
-Its income source is interest from Mortgage Loans
-It can be risky due to defaults from the issuer
c.Hybrid REIT
-It is a combination of Equity and Mortgage
- It has both, Capital Appreciation and Regular Income
-Investments are in Real Estate and Mortgages

Investment Strategies [Core ; Core Plus ; Value Added ; Opportunistic]

a. Core
-Income from regular cashflows rather than capital appreciation
-Low Risk
 -Buy and Hold Strategy
-Investment in properties

b.Core Plus
-Buy a Property ,enhance it and turn it into Core property
-It is then used for normal business with steady income
c. Value Added
-Buy property and enhance it. Then sell it at the right opportunity
-It has higher risk , and has no Cashflows initially
d. Opportunistic
-It is used mostly by Institutional Investors
- It has high risk and high return
-They buy properties in recession and sell when market rises

B] Private Equity [PE]

- It is the equity which is not traded on public exchange
- These are funds from institutional investors and HNIs
-They are limited partnerships with limited partners and general partners or fund managers
Limited partners are real investors who give money[equity] and expect profits
General Managers/Fund Managers are those who manage the fund and receive fees +
profit share/interest
-Successful exit from a business is very important for the PE Funds and also the
businessman. Exit should be at a time when it is beneficial for entrepreneur and also PE
Fund .They look for IRR > Price Paid
Advantages of PE :
i. Higher Returns
PE Funds invest in riskier projects hence it expects higher returns to investors compared to
stocks.
ii. Financing New Projects
Investments are made in innovative and high growth projects ,hence they are very helpful
to young and dynamic entrepreneurs.
iii. Reduces Risk
Investment in PE Fund reduces risk due to the advantage of diversification.
iv. Promotes Entrepreneurship
PE Funds provides funds to young and dynamic entrepreneurs .Thus , it helps innovation
and growth of different individuals ,business , and economy.
Main Types of PE Funds are :[Venture ,LBO,Mezzanine, Angel’s ,FoF]
a.Venture Capital
They provide funds to innovative projects.Since they invest in innovative projects , risk is
very high and hence ,returns are high.
b.Leveraged Buyout [LBO]
It is acquisition [Full/Part] of a company using debt .It is mostly done for financially stable
and high growth companies [i.e Stable Target Co.]
c.Mezzanine Capital
Debt is provided to innovative ,high growth and high potential companies ,since these
companies cannot get loans from Banks and Financial Institutions
d.Angel’s Capital
HNIs provide capital ,expertise and skills to new business which are high growth companies
e.Fund of Funds
These are PE Funds which invest in other PE Funds. It is suitable to new investors who want
to invest in PE market.

C] Hedge Funds
-It is an aggressively managed fund
- Most of the Investors in Hedge Funds are HNIs ,since it requires an initial minimum
investment which is very high.
-Hedge Funds are unregulated ,and often give very high returns
Features of Hedge Funds
1.Limited Partnership
-They are limited partnerships with limited partners and general partners or fund managers
Limited partners are real investors who give money[equity] and expect profits
General Managers/Fund Managers are those who manage the fund and receive fees +
profit share/interest
2. Dynamic Trading Strategies
Hedge Fund Managers use Dynamic & Advanced Investment Strategies such as leverage ,
Derivatives positions.They take advantage of mispricing of securities.
3. Professional Management
Hedge Funds are managed by highly qualified ,experienced and specialized fund managers.
Compensation to these fund managers is based on the performance of the fund.
4. Lack Of Regulations
There are very few regulations for this fund. It is hence important for investors to refer to
past performance of fund and fund managers.
5. Medium to Long term investment horizon
Investors in Hedge Fund have a medium to long term horizon. These fund generally have a
lock-in period of 1 year to 3 years.
6. Large Initial Investment Required
It requires a large initial investment , hence suitable for HNIs and Institutional Investors
Difference Between Mutual Funds and Hedge Funds
MUTUAL FUNDS HEDGE FUNDS
1.Initial Investment Low amt. hence suitable for Very High ,hence suitable for HNIs
Small investors and Institutional Investors
2.Liquidity Highly liquid,open ended They usually have a lock-in period
Funds can be redeemed of 1-3 years
On same day.
3.Investment Use Traditional investments Use dynamic strategies
Strategy like stocks & bonds
4.Regulations Highly regulated Less regulated
5.Risk & Return Low Risk & returns compared Riskier with opportunities
To hedge funds for higher returns.
 Hedge Fund Strategies:
1.Directional Strategies
It involves buying an underpriced security & selling an over priced security.It takes
accurate price forecasting & market timing.
2.EventDriven Strategies
It involves taking advantage of corporate events like mergers/acquisitions ,buyback,
restructuring .It also invests in distresses assets i.e assets of firms which have filed for
bankcrupcy and in poor financial condition.It also invests in High yield securities such as
Junk Bonds which give high interest and are issued at discount to par value.
3.Non Directional Strategies[Relative Value Strategies]
The main objective of this strategy is to make profits by taking advantage of Price
discrepancies between equity, debt, options ,futures

D] Managed Futures
-It is an Investment Strategy in which investments are made in various derivative
instruments such as Options, Futures, and Forwards.
-They require professional managers with high experience and skill.
-It requires timely decisions on buying & selling of futures.
Advantages:
1.Reduces Risk:
It helps Portfolio Managers to hedge the risk associated with bonds & stocks
2.High Liquidity
They are exchange traded,hence offer high liquidity
3.Access to Global Markets
It is possible to access Global Markets
4.Easy Entry & Exit
Due to high liquidity, entry & exit is easy for investors.
5.Higher Returns
They provide higher returns ,hence help to enhance Portfolio Performance
E] Precious Metals
Precious metals such as Gold,Silver ,Platinum ,Diamond are preferred for investment.
They help in portfolio diversification and also provide good returns.
Main Advantages:
1.Tool for Hedging
Gold is a tool for hedging against economic, political ,and social crisis.It is also a hedge
against inflation.
2.High Liquidity
Gold can be easily converted into cash, hence it is highly liquid.
3.Exchange Traded [ETF]
Thru ETFs ,investors can invest in gold in demat form, and can be traded on stock exchange
like shares.
-ETFs are approximately of 1 gram
-Its price is backed by physical gold
-No wealth tax on it
-Long term capital gain after 1 year
-No storage problems,security problems
-Listed on stock exchange hence highly liquid.
4.Low degree of correlation with stocks
Due to low correlation with stocks, it is useful in Portfolio Diversification.
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