INVESTMENT MANAGEMENT ASSIGNMENT:1

Q.1) what is Investment Environment? Explain in detail criteria for

Investment Decission?
ANS- INVESTMENT ENVIRONMENT
CHAPTER NO.1.
WHAT IS INVESTMENT: Investment has different meanings in finance and economics. In economics,
investment is the accumulation of newly produced physical entities, such as factories, machinery, houses,
and goods inventories. In finance, investment is putting money into an asset with the expectation of
capital appreciation, dividends, and/or interest earnings. This may or may not be backed by research and
analysis. Most or all forms of investment involve some form of risk, such as investment in equities,
property, and even fixed interest securities which are subject, among other things, to inflation risk. In
economic theory or in macroeconomics, non-residential fixed investment is the amount purchased per
unit time of goods which are not consumed but are to be used for future production (i.e. capital).
Examples include railroad or factory construction. Investment inhuman capital includes costs of
additional schooling or on-the-job training. Inventory investment is the accumulation of goods
inventories; it can be positive or negative, and it can be intended or unintended.
In measures of national income and output, "gross investment" ( represented by the variable I ) is a
component of gross domestic product (GDP), given in the formula GDP = C + I + G +NX, where C is
consumption, G is government spending, and NX is net exports, given by the difference between the
exports and imports, X M. Thus investment is everything that remains of total expenditure after
consumption, government spending, and net exports are subtracted (i.e. I = GDP C G NX). Nonresidential fixed investment (such as new factories) and residential investment (new houses) combine
with inventory investment to make up I. "Net investment"
INVESTMENT ENVIRONMENT deducts depreciation from gross investment. Net fixed investment
is the value of the net increase in the capital stock per year. Fixed investment, as expenditure over a
period of time (e.g., "per year"), is not capital but rather leads to changes in the amount of capital. The
time dimension of investment makes it a flow. By contrast, capital is a stock that is, accumulated net
investment to a point in time (such as December 31). Inve stment is often modeled as a function of
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income and interest rates, given by the relation I = f(Y, r). An increase in income encourages higher
investment, whereas a higher interest rate may discourage investment as it becomes more costly to
borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents
an opportunity cost of investing those funds rather than lending out that amount of money for interest. In
finance, investment is the purchase of an asset or item with the hope that it will generate income or
appreciate in the future and be sold at the higher price. It generally does not include deposits with a bank
or similar institution. The term investment is usually used when referring to a long-term outlook. This is
the opposite of trading or speculation, which are short-term practices involving a much higher degree of
risk. Financial assets take many forms and can range from the ultra safe low return government bonds to
much higher risk higher reward international stocks. A good investment strategy will diversify the
portfolio according to the specified needs. The most famous and successful investor of all time is Warren
Buffett. In March 2013 Forbes magazine had Warren Buffett ranked as number 2 in their Forbes 400 list.
Buffett has advised in numerous articles and interviews that a good investment strategy is long term and
choosing the right assets to invest in requires due diligence. Edward O. Thorp was a very successful
hedge.
INVESTMENT ENVIRONMENT fund manager in the 1970s and 1980s that spoke of a similar
approach. Another thing they both have in common is a similar approach to managing investment money.
No matter how successful the fundamental pick is, without a proper money management strategy, full
potential of the asset cant be reached. Both investors have been shown to use principles from the Kelly
criterion for money management. Numerous interactive calculators which use the kelly criterion can be
found online. In contrast, dollar (or pound etc.) cost averaging and market timing are phrases often used
in marketing of collective investments and can be said to be associated with speculation. Investments are
often made indirectly through intermediaries, such as pension funds, banks, brokers, and insurance
companies. These institutions may pool money received from a large number of individuals into funds
such as investment trusts, unit trusts, SICAVs etc. to make large scale investments. Each individual
investor then has an indirect or direct claim on the assets purchased, subject to charges levied by the
intermediary, which may be large and varied. It generally, does not include deposits with a bank or similar
institution. Investment usually involves diversification of assets in order to avoid unnecessary and
unproductive risk.

CRITERIA FOR INVESTMENT DECISIONS AND RISK MANAGEMENT

Though it is acknowledged to be risky, investing in corporate securities is now considered to be one of the
generally accepted options of savings management. A large chunk of the savings of the country finds its
way to the stock: markets. Investment in corporate securities offers income in the form of dividend and
interest along with capital appreciation. Judiciously made investment in shares offers liquidity also.
Investing, however, entails risks, but it can be moderated by rational and prudent investment decisions.
Risk management has become imperative for investment management. In India, the current gloomy
corporate scenario and the extremely volatile capital markets have brought risk management to the core of
investment decisions. The more astute and clever investors can take the right investment decisions to
produce the extra reward. In this chapter, an attempt is made to analyse the criteria for investment
decisions and how they are helpful in countering and reducing risks.

The strength of the manage

Investment Criteria
Definition - What does Investment Criteria mean?
Investment criteria are the defined set of parameters used by financial and strategic buyers to
assess an acquisition target. Sophisticated buyers will usually have two sets of criteria:

The parameters that are disclosed publicly to intermediaries such as investment bankers,
so they know what the buyer is looking for in order to source deals that fit; and

The parameters developed for internal review that allow a buyer to quickly determine if
the acquisition should be pursued further.

The most common publicly disclosed investment criteria include the geography, size of the
investment or company targeted, and industry. Some buyers also disclose criteria regarding the
investment type which may include management buyouts (MBO), distressed opportunities, or
succession situations.
Investment criteria are used by buyers to quickly assess acquisition opportunities. They make
the process of sourcing and qualifying new opportunities more efficient. For example, private
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equity firms may look at 250 companies before closing one investment, so having clearly
established investment criteria creates focus and quickly eliminates deals that do not fit the buyer
and/or the seller.
The primary purpose of the criteria disclosed to the general public is to gather as much deal flow
as possible. Once the details of the opportunity are gathered, the internal investment criteria will
be applied to determine if an expression of interest (EOI) or letter of intent (LOI) should be
issued. Somecommon internal investment criteria include:

ment team;

the estimated IRR on the investment;

Customer diversification; and

Q .2 ) WRITE ON FOLLOWING DETAILS

(a) Types of Investors :
There are plenty of stories about people "bootstrapping" startups with their own money. That's
not always possible. Many startups come to the point where they have to depend on investors.
When doing so, it's important to know the different types of investors. The most common types
are:

Banks

Angel investors

Peer-to-peer lenders

Venture capitalists

Personal investors

Regardless of which investor you choose, get it in writing with forms from our business center.
Banks
A bank loan may be available to help you with startup costs. A bank will want to see a
detailed business plan and a thorough description of your business and its prospects. Abusiness
proposal document also states the product or services being offered, your financial and
management projections, and how you plan to implement your goals.
It's easiest to get a loan when you go to a bank with which you already have a relationship. Be
prepared to prove financial responsibility and wait the time it may take to process the loan.
Check into seeking a loan backed by the Small Business Administration. The SBA sets
guidelines for its partners-including lenders, community development organizations and
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microlending institutions-to follow. It guarantees that the loans will be repaid, adding some
leverage to help the lender decide whether to loan you the money.
personal experience in the industry or a good mentor who is well versed in the industry. You may
also have to talk collateral, including possibly a home equity loan, and provide as much startup
cash as you can.
Angel Investors
There are angels on your side when it comes to seeking outside financing. This type of investor
is typically an entrepreneur who has enough wealth to help others. Angel investors invest in
businesses in which they believe but they realize may struggle to find other financing.
An angel investor may buy stock from a company or make a loan. Some serve as mentors and
advisors. Some may specialize, such as high-tech angels who prefer helping to bring new
technology to the marketplace and may or may not want to actively participate in the company.
Another type is a return on investment angel, who expects to see a financial payback from a
high-risk investment. Return on investment angels are more likely to invest when the economy is
stable or improving. They may not want to be involved past investing but are often hopeful that
they will get a huge payoff if the company goes public or gets purchased by a bigger corporation.
Considerations when approaching angel investors include:

How much control does the investor expect?

How much control are you willing to share?

What is the investor's motivation?

How experienced is the investor?

Does your venture meet the investor's investment requirements?

A promissory note spells out the repayment terms of the loan. We offer a promissory loan
document template for free.
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Peer-to-Peer Lending
Welcome to starting a business in the high-tech world of today. Peer-to-peer lending lets people
list projects online for consideration by potential investors. This type of investor brings the
startup and small business owners together with entrepreneurs willing to help and invest.
Prosper and Lending Club are among websites that specialize in peer-to-peer or P2P lending.
"We cut out the middleman to connect people who need money with those who have money to
invest," Prosper states on its website.
Peer-to-peer lending steps, shared by the Small Business Administration, include:

Have a plan. Make sure to include what you find out from market research, competitive
analysis, financial forecasts, expected returns and more.

Tell your story. Tell what you hope to achieve and what your background is.

Share your achievements and progress. Basically, sell yourself and your business. How
much have you invested yourself and at what stage is your business? What milestones have
you reached? You want to prove to potential investors that your business is on the path to
success. Going peer-to-peer lending may cut out the middleman, but not financial common
sense on the part of investors.

Your credit history plays a part in whether you can engage in peer-to-peer lending. You grant
access to your credit score when you apply for a peer-to-peer loan. This type of investor may
require you to improve your credit history before finding you loan-worthy.
If engaging in peer-to-peer lending, make sure you understand the terms of your loan and make
payments on time. Falling behind can increase your fees and prevent you from seeking another
peer-to-peer loan.
Check in your state to see if there are any specific regulations concerning peer-to-peer lending.
Our On Call legal service can help you find a local attorney with that knowledge.
Venture Capitalists

Once you've proven yourself a bit more, it's time to consider venture capitalists. This type of
investor expect you to show you have a solid business plan. A venture capitalist also wants to see
a high return of profit.
Venture capitalists may invest as much as millions of dollars. They will invest the money needed
to help that happen. They do that by securing equity capital, or a share in your company. They
are betting that the share will be worth more within time and will wait to get a return on the
investment.
Giving up that equity capital means giving up some ownership or say in the company. Venture
capitalists may also want a steeper return on their investment than what the interest rate may be
on a business loan.
Consider having all parties sign a limited partnership agreement to spell out the rights and duties
of each partner.
Personal Investors
Your friends and family may be willing to lend you the cash to start a business, and you may be
willing to take it. But think twice before heading in this direction.
Mixing business with family is risking, bringing business disputes to family gatherings and other
events. You risk hurting not only your finances but also a relative's or friend's if the business
doesn't take off as well as you anticipate. There are stories about people successfully choosing
this option, but before you do, make sure your family ties are strong enough to withstand the
pressures of doing business. Have each party sign a promissory note that spells out the
repayment terms or, if you are partnering with a friend or family member, sign a partnership
agreement.
These are the different types of investors that may help you launch your dream company.
Remember, each situation is different, and take legal precautions before reaching out to any
investor. Our On Call attorney service can match you up with a lawyer well versed in business
law.

(b) Investor Objectives

On 07/07/2010, In Investor Profiles, By Jordan Wilson

Previously we considered how ones risk tolerance and the phase in ones life cycle should
impact each individuals investment strategy.
It is also very important to assess your unique investment objectives and constraints.
Today we will look at ones investment objectives.
There are five separate categories of investor goals or objectives. While all individuals share
these common categories, the speScific objectives within each will be unique to each person.
Emergency Funds
Although not really an investment goal, it should be an objective to maintain enough liquidity to
deal with any emergencies that may arise.
I suggest that you hold approximately 3-6 month of basic living costs in liquid funds.
This should provide protection against short term emergencies such as job loss, personal injury,
damage or loss of personal property such as your vehicle, or any other unplanned event that will
drain your resources.
Liquid funds includes cash and cash equivalent assets. Savings accounts, money market funds,
short term term deposits, etc. Assets that can be converted to cash very quickly and at no penalty
to you for so doing.
Also, assets that are extremely stable (i.e. very low volatility and therefore low risk), yet have
better upside than traditional cash investments.
I would recommend money market or other funds to hold your liquid assets. These latter funds
include certain low risk bond and equity funds, exchange traded funds, capital protection funds,
to list a few examples. The key is being able to sell them rapidly at little or no cost on disposal.
Near-Term High Priority
This category reflects major goals whose time horizon is relatively short.
Examples may be a new home or vehicle, paying for your education, or even taking a trip if it is
extremely important to you.

As the time to the goal is close, you want to increase the certainty of the investments return. You
should invest in low risk, stable investments that provide a relatively known result.
Cash or cash equivalents would fall into this area. Short term bonds may also be useful
investments. In certain situations, other funds may also be appropriate.
It is important to try and match the maturity of your asset to the expected date of the expenditure.
Long-Term High Priority
This category reflects critical objectives whose time horizon is a long ways off.
An example would be in achieving financial independence at age 65. Another might be to buy a
lake house or a winter condo in Florida by the time you are 50.
Because of the long time frame, you have the ability to ride out the ups and downs of highly
volatile investments. This allows you to invest in assets that have relatively high risk and greater
expected returns.
The longer time frame also allows you to invest in less liquid assets. If you are currently 30 and
are planning to buy a ski chalet by age 45, you have 15 years to work with. As the date
approaches you can find a beneficial time to sell.
Lower Priority
This category may have short, medium, or long time horizons.
These goals have some importance, but they are secondary to the ones discussed above. Usually
they are nice to have achieved. But if they are not reached, it is not crucial to your existence.
These usually involve discretionary spending objectives. That is, expenditures that are nonessential or voluntary in nature. Examples include: charitable giving, vacations, buying a boat,
non-critical business ventures.
With lower priorities, you can match the investment risk to the time frame as we did above.
Many individuals though, take a more speculative approach in investing for lower priority goals.

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As the objective is less important to the individual, the investor may invest in extremely high risk
assets in the hope of abnormal returns. If it is successful, great. If unsuccessful and funds are not
available to meet the goal, its lack of attainment was not critical.
Entrepreneurial
This category involves entrepreneurial or money-making ventures and covers any time frame.
Portfolio diversification is usually not an issue in this category. Instead, investors tend to take an
all eggs in one basket view to their entrepreneurial activities.
As you can expect, this is normally a high risk investment with the potential for high rewards (or
total loss).
That sums up the categories of investor objectives.
In future, as you develop financial goals, try to determine which classification each one fits into.
Then, develop appropriate investment strategies and tactics to attain each goal.

(c) investing vs speculating

|

The main difference between speculating and investing is the amount of of risk undertaken
in the trade. Typically, high-risk trades that are almost akin to gambling fall under the umbrella
of speculation, whereas lower-risk investments based on fundamentals and analysis fall into the
category of investing. Investors seek to generate a satisfactory return on their capital by taking on
an average or below-average amount of risk. On the other hand, speculators are seeking to make
abnormally high returns from bets that can go one way or the other. It should be noted that
speculation is not exactly like gambling because speculators do try to make an educated decision
on the direction of the trade, but the risk inherent in the trade tends to be significantly above
average.
As an example of a speculative trade, consider a volatile junior gold mining company that has an
equal chance over the near term of skyrocketing from a new gold mine discovery or going
bankrupt. With no news from the company, investors would tend to shy away from such a risky
trade, but some speculators may believe that the junior gold mining company is going to strike
gold and may buy its stock on a hunch. This would be speculation.

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(d) Investing vs speculating

The main difference between speculating and investing is the amount of of risk undertaken in
the trade. Typically, high-risk trades that are almost akin to gambling fall under the umbrella of
speculation, whereas lower-risk investments based on fundamentals and analysis fall into the
category of investing. Investors seek to generate a satisfactory return on their capital by taking on
an average or below-average amount of risk. On the other hand, speculators are seeking to make
abnormally high returns from bets that can go one way or the other. It should be noted that
speculation is not exactly like gambling because speculators do try to make an educated decision
on the direction of the trade, but the risk inherent in the trade tends to be significantly above
average.
As an example of a speculative trade, consider a volatile junior gold mining company that has an
equal chance over the near term of skyrocketing from a new gold mine discovery or going
bankrupt. With no news from the company, investors would tend to shy away from such a risky

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trade, but some speculators may believe that the junior gold mining company is going to strike
gold and may buy its stock on a hunch. This would be speculation.
As an example of investing, consider a large stable multinational company. The company may
pay a consistent dividend that increases annually, and its business risk is low. An investor may
choose to invest in this company over the long-term to make a satisfactory return on his or her
capital while taking on relatively low risk. Additionally, the investor may add several similar
companies across different industries to his or her portfolio to diversify and further lower their
risk.

Q3) what are the investment avenue are available to the investor? Discuss the
factor influencing selection of investment alternatives?
Ans-

Different Avenues of Investments

In the modern financial system there are so many investment cuavenues to choose from

today in financial market and it has become difficult for anyone to decide about these avenues.
Some of these investment avenues offer attractive returns but with high risks and some offer
lower returns with very low risks. An overall analysis of these investment avenues with risk and

return trade is presented in this article. These investment avenues are:

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Equity: Equity is an investment avenue which is able to offer the highest possible returns but is
very risky as there are huge probabilities of investors even losing some part of the invested
capital too. This can offer returns in range of 15- 50% annually in good times and negative
returns of 5-15% also.

Mutual Funds: Mutual funds offer moderate returns but are less risky compared to equity
investments. They can offer a return between 12-30% annually in good times. May be even
higher in good times and negative returns of 5-10& annually.

Bonds: These have very less risks so offers lower returns. The return from bonds ranges between
7-10% annually.

Commodities: These investments are made in commodities such as rice, wheat, metals. This is
very tricky investment. Return from these investments varies between 10-35%. One should be
able to understand the weather, crop cycle and market dynamics.

Bullion: Bullion are part of commodities. One can invest in gold, silver and platinum. These
fetch high returns but are also very volatile.

Futures & Option: These investments can offer 5-10% return even in a day. This market is also
very tricky.

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Real Estate: One can also invest in real estate. This investment offers attractive return. But the
price fluctuation in bad times very high. And one needs lakhs of rupees to get started in this
market.

Govt. and RBI Bonds: These offer fix rate of return over period of time.

Company Bonds: These are same as govt. bonds. Only difference is that these are more risky.

Post Office Investments: These are the risk free investments. And offer lower return.
Insurance: Insurance have become one of the most important investment avenues in India. Unit
Linked Insurance Plans are very popular in India besides the traditional endowment policies.
Provident Funds: This one of the safest long term investment option. This is mainly
for retirement purpose.
There are so many other options available such as carbon trading, currency trading, power
trading and so many. One should choose investment avenues according to her/his financial goal
and knowledge about the financial instruments.
Your views matter a lot for a healthy discussion.

Factors that affect the selection of Invest Alternatives

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Investment objectives

The purpose of the investment must be made clear before the selection from available
alternatives. Generally most investments are undertaken to provide an increase in wealth. The
higher the level of desired wealth, the higher the return that must be received. An investor
seeking higher returns must be willing to face higher level of risk. The investment purpose may
different according to time and life age of a person.

Rate of return

The basic principle of investment is to secure maximum return with minimum risk. The expected
rate of return from an investment alternative should be accurate. Since it is a forecast, there is
usually some variability about the precise amount of the return. If the expected rate of return is
not accurate then the investor may divert or change his investment in other alternatives.
Risk

Risk is the variability of possible returns around the expected return of an investment. Each
investor has his/her own attitude about risk and how much he or she can tolerate. Since
investments of risk associated with them, the investor must determine which, combination
alternatives match his or her particular risk tolerances.
Taxes

Government tax policy is also a determining factor while choosing among investment
alternatives. It also depends upon the perception of different investors that some may be
interested in tax exempt asset while others may be interested in high yielding but taxable
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returning assets. The investors should also consider about tax laws that provide many deductions
in the consumption of taxable income.

Investment horizon
Investment period is also a factor to determine the investment alternatives. The return on
investment is affected by the investment period. It affects not only the return and risk but also
frequently the tax consequences associated with the return.

Investment strategies
While selecting an investment alternatives investment strategies should also be considered by an
investor. Investment strategy includes three elements.

Investment selection
Under this elements two procedures should be completed:

Identifying appropriate investment alternatives or categories.

Selecting individual securities or assets in each category.

Investment timing
Another important element while choosing an investment alternative is timing. It refers to
purchasing an asset just before it is likely to increase in value and selling the asset just before it
is likely decrease in value.
Diversification-Investment risk can be reduced by maintaining a portfolio or by including more
than one alternative or category.

ASSIJNGMENT NO:2
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Q1)

Element the meaning of Risk, types of risk, systematig and

unsystematic division and variances?|

ANS MEANING AND DEFINATION OF RISK
The chance that an investment's actual return will be different than expected. Risk includes the
possibility of losing some or all of the original investment. Different versions of risk are usually
measured by calculating the standard deviation of thehistorical returns or average returns of a
specific investment. A high standard deviation indicates a high degree of risk.
Many companies now allocate large amounts of money and time in developing risk
management strategies to help manage risks associated with their business and investment
dealings. A key component of the risk mangement process is risk assessment, which involves the
determination of the risks surrounding a business or investment.

Types of Risks
Now that we've covered the key tasks of risk management we need to understand that there are
different types of risks which have different impacts and therefore need to be treated differently.
The following list covers pretty much every risk you can think of, fortunately they don't always
apply. For example, if you have been working with the same team in the same office for many
years the team environment risks won't apply. But it's good to be aware of all of the types of
risks as it helps to understand all the things that can go wrong. It might seem a bit overwhelming
to consider things from such a negative point of view but that's what risk management is about,
it's trying to work out what all the problems are so that you can avoid them or manage them
effectively. A lack of risk management is what leads to the high failure rates of projects.
It's important to understand that risks aren't just defined to the project, they also apply to the
business, the suppliers, the people working on the project as well as the system and people that
have to support and use the project. There are a lot of angles to consider, some of which won't

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matter, some of which will be significant and need action. These can all be captured under the
following five categories.

Project Risk

Business Risk

Production System Risk

Benefits Realisation Risk

Personal Risk

Project Risk
Put simply, project risks are factors that could cause the project to fail. They are the most
significant of the risk types and has a number of sub types that need to be considered, these are

System or product complexity

Client or target environment

Team environment

Business project risk

System Complexity
This is about how big and complex the project is eg.

The number of features

The volume of content

The levels of workflow required

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The levels of permissions required

The clarity of the requirements

The expected volume of traffic

The expected number of users

The expected response times

Each of these factors can impact on the project and what type of risks they are subject to. For
example, a site with no workflow but a large volume of content and high traffic would need to
consider performance as a major element wheras a smaller site that has an ecommerce
component would have security as a high risk factor.
Target Environment
This is about where the end solution will be used and the nature of the users. Eg.

The level of internet access

The knowledge level of the users

Public or internal system

The level of interaction with the system required

The quality of the equipment being used, screen resolution/plugins requiredetc

The degree of project sponsor buy-in and support;

The impact of the solution on the people using it

These days, internet applications are being used more and more both internally and externally
therefore can have a significant impact on the business if they fail.

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Team Environment
This would have to be one of the most important risk types. The team makes a huge difference to
the success of a project. If you have a well functioning experienced team, it's a huge advantage.
This risk type needs careful consideration. It can make or break a project. The main factors to
consider are

Is the timeline fixed or flexible

Has the team worked together before?

Is the team experienced with ez publish?

Will the team stay consistent throughout the project?

Will outside contractors be required?

Is the team working together?

Is it a positive work environment

Does the team have the equipment they need?

A new team without experience is a recipe for disaster. Anyone new to a technology will have a
learning curve that will increase the length of the project and impact on the quality of the
outcome.
Business Project Risk
Along with the overall system complexity there's also the business project risk which is similar
but not the same. It is about the business aspect of the project, not the end result. If the project is
moving into a new area that hasn't been tried or tested, the risk is greater as there's no indication
of how it's going to be accepted or if it will achieve the goals it's supposed to. There's a big
difference in replacing a static website with one built with a CMS as apposed to a web

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application to be used to provide online quotes for insurance products. The factors to look for in
business project risks are:

The intrinsic complexity of the business product;

The level of innovation;

The stability of requirements;

The required level of quality;

The level of compliance to processes or legislation

For a business, a complex project has a higher chance of failing as change within businesses can
be difficult to introduce. If the level of innovation is high, there is also a risk as we are dealing
with something new and unknown that might not work as expected. If we have to compile with
certain legal criteria we expose the business to legal action if its not done properly.
Business risk
We've looked at the types of risks that can cause the project to fail but there's another level to
consider, what happens to the business if the project fails? In some cases, eg. rebuilding an
intranet, the impact won't be significant if the current intranet keeps working but if the project is
the sole interface the business has to it's clients, the impact could cause the business to go under.
What you want to look for in this type of risk is what exposure the business will face if the
project fails.
From the financial perspective the business can loose money on the project if the benefits arent
delivered. Strategically if the project fails it can mean the business misses an opportunity to be
first to market with a new service offering. If the site fails to compile with legal requirements, the
business could be exposed to legal action. If the site isnt secure enough it can expose the
business to financial loss. If the site fails to perform and keeps going offline, the image and
reputation of the business can be affected.

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Production System Risk

The business case for projects often fails to consider the ongoing cost of the solution.
A simple example is the need for server monitoring and security patches. A better example is the
risk faced by not upgrading to the latest version of an application once the version you're using is
no longer supported. But the best example is the training and support required for people using
the system and any changes that might be needed. From the client's perspective, I've found that
there's excitement and enthusiasm to get the solution up and running but when it comes to
maintenance, it doesn't seem quite as important. Once its up and running, people move on to
other projects and soon forget about solution they jus delivered. Just like a car, a web application
needs regular servicing and tuning. Ignoring this can lead to performance issues if the site is not
monitored and maintained. .
The things to look for are

The provision for support and maintenance

The experience of the production support team members;

The age of the production system and versions of software

The level of supporting documentation and training.

The higher the risk of the production system, the more likely the system will fail and take longer
(or more effort hours) to fix. For some web applications, outages literally cost the business
money so if attention isn't paid, the client will end up paying one way or another.
Benefits Realisation Risk
Although it's often forgotten once a project is underway or has been delivered, there is always a
reason for the project in the first place. The reason a business undertakes a project is to realise
benefits in one way or another, whether it be increase in sales or improving efficiency. It's all too

23

easy to get caught up in the details of the project and forget the bigger picture, especially when
you're struggling to get content and deliver the project on time.
What needs to be considered is how realistic it is that the business will get the benefits they hope
to achieve the factors to consider include:

The number of different stakeholders, clients and external partners involved

The need for culture changes / training / acceptance of the new solution

The degree of management buy-in

The time-frame for benefits realisation; and

The size of the benefits to be realized.

The more stakeholders there are, the more people that will have input and need to be consulted
on decisions slowly the process down. If there is a need for changes to the way the business run,
theres a chance people will reject the new process in favour of the tried and trusted method. If
there isnt enough time to realize the benefits of the solution, it might be considered a failure. If
the expectations are the solution will solve lots of problems there will be greater pressure to get
things right.
Personal Risk
This is also often forgotten, especially by management (unless you are management!). What is it
going to mean to you or your team if this project fails? No doubt this is something that is going
to be in the back of your mind and it's important to bring this to the surface so that management
or your client is aware of the situation. And this is a serious type of risk, people can get hurt,
financially by loosing a job or their health can suffer due to stress not to mention potential legal
exposure. The pressures of work can have an impact on physical and mental health not to
mention professional and personal relationships. Some people under too much pressure will
literally break down. Is any project worth that?

24

This risk is not just on the Project Manager although they are the most likely
target for stress. It can affect everyone on the project. If the Project Manager
is unable to negotiate with the client (be in an internal or external project)
and the deadline cant be moved, then the pressure moves to the
development team who are asked to work longer and longer hours .

Systematic And Unsystematic Risk

Unsystematic risk, also known as "specific risk," "diversifiable risk" or "residual risk," is the
type of uncertainty that comes with the company or industry you invest in. Unsystematic risk can
be reduced through diversification. For example, news that is specific to a small number of
stocks, such as a sudden strike by the employees of a company you have shares in, is considered
to be unsystematic risk. Systematic risk, also known as "market risk" or "un-diversifiable risk",
is the uncertainty inherent to the entire market or entire market segment. Also referred to
as volatility, systematic risk consists of the day-to-day fluctuations in a stock's price. Volatility is
a measure of risk because it refers to the behavior, or "temperament," of your investment rather
than the reason for this behavior. Because market movement is the reason why people can make
money from stocks, volatility is essential for returns, and the more unstable the investment the
more chance there is that it will experience a dramatic change in either direction.
Interest rates, recession and wars all represent sources of systematic risk because they affect the
entire market and cannot be avoided through diversification. Systematic risk can be mitigated
only by being hedged.
Systematic risk underlies all other investment risks. If there is inflation, you can invest in
securities in inflation-resistant economic sectors. If interest rates are high, you can sell your
utility stocks and move into newly issued bonds. However, if the entire economy underperforms,
then the best you can do is attempt to find investments that will weather the storm better than the
broader market. Popular examples are defensive industry stocks, for example, or bearish options
strategies.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to
25

the market as a whole. In other words, beta gives a sense of a stock's market risk compared to the
greater market. Beta is also used to compare a stock's market risk to that of other stocks.
Investment analysts use the Greek letter '' to represent beta. Beta is used in the capital asset
pricing model (CAPM), as we described in the previous section.
Beta is calculated using regression analysis, and you can think of beta as the tendency of a
security's returns to respond to swings in the market. A beta of 1 indicates that the security's price
will move with the market. A beta of less than 1 means that the security will be less volatile than
the market. A beta of greater than 1 indicates that the security's price will be more volatile than
the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the
market.
Many utility stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks
have a beta greater than 1, offering the possibility of a higher rate of return, but also posing more
risk.
Beta helps us to understand the concepts of passive and active risk. The graph below shows a
time series of returns (each data point labeled "+") for a particular portfolio R(p) versus the
market return R(m). The returns are cash-adjusted, so the point at which the x and y axes
intersect is the cash-equivalent return. Drawing a line of best fit through the data points allows us
to quantify the passive, or beta, risk and the active risk, which we refer to as alpha.

26

The gradient of the line is its beta. For example, a gradient of 1.0 indicates that for every unit
increase of market return, the portfolio return also increases by one unit. A manager employing a
passive management strategy can attempt to increase the portfolio return by taking on more
market risk (i.e., a beta greater than 1) or alternatively decrease portfolio risk (and return) by
reducing the portfolio beta below 1. Essentially, beta expresses the fundamental tradeoff between
minimizing risk and maximizing return. Let's give an illustration. Say a company has a beta of 2.
This means it is two times as volatile as the overall market. Let's say we expect the market to
provide a return of 10% on an investment. We would expect the company to return 20%. On the
other hand, if the market were to decline and provide a return of -6%, investors in that company
could expect a return of -12% (a loss of 12%). If a stock had a beta of 0.5, we would expect it to
be half as volatile as the market: a market return of 10% would mean a 5% gain for the company.
Investors expecting the market to be bullish may choose funds exhibiting high betas, which
increase investors' chances of beating the market. If an investor expects the market to
be bearish in the near future, the funds that have betas less than 1 are a good choice because they
would be expected to decline less in value than the index. For example, if a fund had a beta of
0.5 and the S&P 500 declined 6%, the fund would be expected to decline only 3%. (Learn more
about volatility in Understanding Volatility Measurements and Build Diversity Through Beta.)
Here is a basic guide to various betas:

Negative beta - A beta less than 0 - which would indicate an inverse relation to the
market - is possible but highly unlikely. Some investors used to believe that gold and gold
stocks should have negative betas because they tended to do better when the stock market
declined, but this hasn't proved to be true over the long term.

Beta of 0 - Basically, cash has a beta of 0. In other words, regardless of which way the
market moves, the value of cash remains unchanged (given no inflation).

Beta between 0 and 1 - Companies with volatilities lower than the market have a beta of
less than 1 (but more than 0). Many utilities fall in this range.
27

Beta of 1 - A beta of 1 represents the volatility of the given index used to represent the
overall market against which other stocks and their betas are measured. The S&P 500 is
such an index. If a stock has a beta of 1, it will move the same amount and direction as
the index. So, an index fund that mirrors the S&P 500 will have a beta close to 1.

Beta greater than 1 - This denotes a volatility that is greater than the broad-based index.
Many technology companies on the Nasdaq have a beta higher than 1.

Beta greater than 100 - This is impossible as it essentially denotes a volatility that is 100
times greater than the market. If a stock had a beta of 100, it would be expected to go to 0
on any decline in the stock market. If you ever see a beta of over 100 on a research site, it
is usually either the result of a statistical error or a sign that the given stock has
experienced large swings due to low liquidity, such as an over-the-counter stock

Q2) Analyses the data and make the distingusha between stander
deviation and variance?
Data analysi
Analysis of data is a process of inspecting, cleaning, transforming, and modeling data with the
goal of discovering usefulinformation, suggesting conclusions, and supporting decision-making.
Data analysis has multiple facets and approaches, encompassing diverse techniques under a
variety of names, in different business, science, and social science domains.
Data mining is a particular data analysis technique that focuses on modeling and knowledge
discovery for predictive rather than purely descriptive purposes. Business intelligence covers
data analysis that relies heavily on aggregation, focusing on business information. In statistical
28

applications, some people divide data analysis into descriptive statistics, exploratory data
analysis (EDA), and confirmatory data analysis (CDA). EDA focuses on discovering new
features in the data and CDA on confirming or falsifying existing hypotheses. Predictive
analytics focuses on application of statistical models for predictive forecasting or classification,
whiletext analytics applies statistical, linguistic, and structural techniques to extract and classify
information from textual sources, a species of unstructured data. All are varieties of data
analysis.
Data integration is a precursor to data analysis, and data analysis is closely linked to data
visualization and data dissemination. The term data analysis is sometimes used as a synonym
for data modeling.

The process of data analysis

Analysis refers to breaking a whole into its separate components for individual examination.
Data analysis is aprocess for obtaining raw data and converting it into information useful for
decision-making by users. Data is collected and analyzed to answer questions, test hypotheses or
disprove theories.[1]
Statistician John Tukey defined data analysis in 1961 as: "Procedures for analyzing data,
techniques for interpreting the results of such procedures, ways of planning the gathering of data
to make its analysis easier, more precise or more accurate, and all the machinery and results of
(mathematical) statistics which apply to analyzing data."[2]
There are several phases that can be distinguished, described below. The phases are iterative, in
that feedback from later phases may result in additional work in earlier phases.[3]
Data requirements[edit]
The data necessary as inputs to the analysis are specified based upon the requirements of those
directing the analysis or customers who will use the finished product of the analysis. The general
type of entity upon which the data will be collected is referred to as an experimental unit (e.g., a
person or population of people). Specific variables regarding a population (e.g., age and income)
29

may be specified and obtained. Data may be numerical or categorical (i.e., a text label for
numbers).[3]
Data collection[edit]
Data is collected from a variety of sources. The requirements may be communicated by analysts
to custodians of the data, such as information technology personnel within an organization. The
data may also be collected from sensors in the environment, such as traffic cameras, satellites,
recording devices, etc. It may also be obtained through interviews, downloads from online
sources, or reading documentation.[3]

Data cleaning[edit]
Once processed and organized, the data may be incomplete, contain duplicates, or contain errors. The need for
data cleaning will arise from problems in the way that data is entered and stored. Data cleaning is the process
of preventing and correcting these errors. Common tasks include record matching, deduplication, and column
segmentation.[4] Such data problems can also be identified through a variety of analytical techniques. For
example, with financial information, the totals for particular variables may be compared against separately
published numbers believed to be reliable.[5] Unusual amounts above or below pre-determined thresholds may
also be reviewed. There are several types of data cleaning that depend on the type of data. Quantitative data
methods for outlier detection can be used to get rid of likely incorrectly entered data. Textual data
spellcheckers can be used to lessen the amount of mistyped words, but it is harder to tell if the words
themselves are correct.[6]

Exploratory data analysis[edit]

Once the data is cleaned, it can be analyzed. Analysts may apply a variety of techniques referred to
as exploratory data analysis to begin understanding the messages contained in the data. [7][8] The process of
exploration may result in additional data cleaning or additional requests for data, so these activities may be
iterative in nature. Descriptive statistics such as the average or median may be generated to help understand the
data. Data visualization may also be used to examine the data in graphical format, to obtain additional insight
regarding the messages within the data.[3]

30

Modeling and algorithms

Mathematical formulas or models called algorithms may be applied to the data to identify relationships among
the variables, such as correlation or causation. In general terms, models may be developed to evaluate a
particular variable in the data based on other variable(s) in the data, with some residual error depending on
model accuracy (i.e., Data = Model + Error).[1]
Inferential statistics includes techniques to measure relationships between particular variables. For
example, regression analysis may be used to model whether a change in advertising (independent variable X)
explains the variation in sales (dependent variable Y). In mathematical terms, Y (sales) is a function of X
(advertising). It may be described as Y = aX + b + error, where the model is designed such that a and b
minimize the error when the model predicts Y for a given range of values of X. Analysts may attempt to build
models that are descriptive of the data to simplify analysis and communicate results. [1]

Data product
A data product is a computer application that takes data inputs and generates outputs, feeding them back into
the environment. It may be based on a model or algorithm. An example is an application that analyzes data
about customer purchasing history and recommends other purchases the customer might enjoy.[3]

difference between standard deviation and variance

31

Standard deviation and variance, though basic mathematical concepts, play important
roles in many areas of the financial sector, including accounting, economics and
investing. In investing, for example, a firm grasp of the calculation and interpretation of
these two measurements is crucial for the creation of an effective trade strategy.
Both standard deviation and variance are derived from the mean of a given data set.
Whereas the mean is simply the average of all data points, the variance measures the
average degree to which each point differs from the mean. The greater the variance, the
larger the overall data range. For the variance, first calculate the difference between each
point and the mean. The results are squared and averaged to produce the variance. For
simplicity's sake, this example uses a data set consisting of the numbers between 1 and
10, giving a mean of 5.5. Squaring the difference between each data point and the mean
and averaging the squares renders a variance of 8.25.
Standard deviation is simply the square root of the variance. The calculation of variance
uses squares because it weights outliers more heavily than data very near the mean. This
also prevents differences above the mean from canceling out those below, which can
sometimes result in a variance of zero. However, because of this squaring, the variance is
no longer in the same unit of measurement as the original data. Taking the root of the
variance means the standard deviation is restored to the original unit of measure. For
traders and analysts, these two concepts are of paramount importance as the standard
deviation is used to measure market volatility, which in turn plays a large role in creating
a profitable trade strategy.
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32

Q3) what is portfolio and exercise the expected return of

portfolio?
Return, Risk - Expected Return, Variance And Standard Deviation
Of A Portfolio
Expected return is calculated as the weighted average of the likely profits of the assets in the
portfolio, weighted by the likely profits of each asset class. Expected return is calculated by
using the following formula:

Written another way, the same formula is as follows: E(R) = w1R1 + w2Rq + ...+ wnRn
Example: Expected Return
For a simple portfolio of two mutual funds, one investing in stocks and the other in bonds, if we
expect the stock fund to return 10% and the bond fund to return 6% and our allocation is 50% to
each asset class, we have the following:
Expected return (portfolio) = (0.1)*(0.5) + (0.06)*(0.5) = 0.08, or 8%
Expected return is by no means a guaranteed rate of return. However, it can be used to forecast
the future value of a portfolio, and it also provides a guide from which to measure actual returns.
Let's look at another example. Assume an investment manager has created a portfolio with Stock
A and Stock B. Stock A has an expected return of 20% and a weight of 30% in the portfolio.
Stock B has an expected return of 15% and a weight of 70%. What is the expected return of the
portfolio?

33

E(R) = (0.30)(0.20) + (0.70)(0.15)

= 6% + 10.5% = 16.5%
The expected return of the portfolio is 16.5%.
Now, let's build on our knowledge of expected returns with the concept of variance.

Variance
Variance (2) is a measure of the dispersion of a set of data points around their mean value. In
other words, variance is a mathematical expectation of the average squared deviations from the
mean. It is computed by finding the probability-weighted average of squared deviations from the
expected value. Variance measures the variability from an average (volatility). Volatility is a
measure of risk, so this statistic can help determine the risk an investor might take on when
purchasing a specific security.
Example: Variance
Assume that an analyst writes a report on a company and, based on the research, assigns the
following probabilities to next year's sales:
Scenario
1
2
3
3

Probability
0.10
0.30
0.30
0.30

Sales ($ Millions)
$16
$15
$14
$13

The analyst's expected value for next year's sales is (0.1)*(16.0) + (0.3)*(15.0) + (0.3)*(14.0) +
(0.3)*(13.0)

$14.2

million.

Calculating variance starts by computing the difference in each potential sales outcome from
$14.2 million, then squaring:
Scenari
o

Probability

Deviation from Expected

Value
34

Squared

1
2
3
4

0.1
0.30
0.30
0.30

(16.0 - 14.2) = 1.8

(15.0 - 14.2) = 0.8
(14.0 - 14.2) = - 0.2
(13.0 - 14.2) = - 1.2

3.24
0.64
0.04
1.44

Variance then weights each squared deviation by its probability, giving us the following
calculation:
(0.1)*(3.24)

(0.3)*(0.64)

(0.3)*(0.04)

Portfolio

(0.3)*(1.44)

= 0.96
Variance

Now that we've gone over a simple example of how to calculate variance, let's look at portfolio
variance.
The variance of a portfolio's return is a function of the variance of the component assets as well
as the covariance between each of them. Covariance is a measure of the degree to which returns
on two risky assets move in tandem. A positive covariance means that asset returns move
together. A negative covariance means returns move inversely. Covariance is closely related to
"correlation," wherein the difference between the two is that the latter factors in the standard
deviation.
Modern portfolio theory says that portfolio variance can be reduced by choosing asset classes
with a low or negative covariance, such as stocks and bonds. This type of diversification is used
to reduce risk.
Portfolio variance looks at the covariance or correlation coefficient for the securities in the
portfolio. Portfolio variance is calculated by multiplying the squared weight of each security by
its corresponding variance and adding two times the weighted average weight multiplied by the
covariance of all individual security pairs. Thus, we get the following formula to calculate
portfolio variance in a simple two-asset portfolio:
35

(weight(1)^2*variance(1) + weight(2)^2*variance(2) + 2*weight(1)*weight(2)*covariance(1,2)

Here is the formula stated another way:

Portfolio Variance = w2A*2(RA) + w2B*2(RB) +
2*(wA)*(wB)*Cov(RA,

RB)

Where: wA and wB are portfolio weights, 2(RA) and 2(RB)

are

variances

and

Cov(RA, RB) is the covariance

Example:

Portfolio

Variance

Data on both variance and covariance may be displayed in a covariance matrix. Assume the
following covariance matrix for our two-asset case:
Stock
Stock
Bond

Bond
350
150

80

From this matrix, we know that the variance on stocks is 350 (the covariance of any asset to
itself equals its variance), the variance on bonds is 150 and the covariance between stocks and
bonds is 80. Given our portfolio weights of 0.5 for both stocks and bonds, we have all the terms
needed to solve for portfolio variance.
Portfolio variance = w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cov(RA, RB) =(0.5)2*(350) +
(0.5)2*(150) + 2*(0.5)*(0.5)*(80) = 87.5 + 37.5 + 40 = 165.
Standard Deviation
Standard deviation can be defined in two ways:

36

1. A measure of the dispersion of a set of data from its mean. The more spread apart the data, the
higher the deviation. Standard deviation is calculated as the square root of variance.
2. In finance, standard deviation is applied to the annual rate of return of an investment to
measure the investment's volatility. Standard deviation is also known as historical volatility and
is used by investors as a gauge for the amount of expected volatility.
Standard deviation is a statistical measurement that sheds light on historical volatility. For
example, a volatile stock will have a high standard deviation while a stable blue chip stock will
have a lower standard deviation. A large dispersion tells us how much the fund's return is
deviating from the expected normal returns.
Example: Standard Deviation
Standard deviation () is found by taking the square root of variance:
(165)1/2 = 12.85%.
We used a two-asset portfolio to illustrate this principle, but most portfolios contain far more
than two assets. The formula for variance becomes more complicated for multi-asset portfolios.
All terms in a covariance matrix need to be added to the calculation.
Let's look at a second example that puts the concepts of variance and standard deviation together.

Q4) wollowingrite on the following

37

(a)Portfolio Risks One 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. Since
standard deviation is the square root of the variance, variance is another crucial concept to know.
The variance is calculated by weighting each possible dispersion by its relative probability (take
the difference between the actual return and the expected return, then square the number).
The standard deviation of an investment's expected return is considered a basic measure of risk.
If two potential investments had the same expected return, the one with the lower standard
deviation would be considered to have less potential risk.
Risk measures
There are three other risk measures used to predict volatility and return:

Beta - This measures stock price volatility based solely on general market movements.
Typically, the market as a whole is assigned a beta of 1.0. So, a stock or a portfolio with a
beta higher than 1.0 is predicted to have a higher risk and, potentially, a higher return
than the market. Conversely, if a stock (or fund) had a beta of .85, this would indicate that
if the market increased by 10%, this stock (or fund) would likely return only 8.5%.
However, if the market dropped 10%, this stock would likely drop only 8.5%.
Learn how to properly use this measure to help you meet your criteria for risk within the
article Beta: Gauging Price Fluctuations.

Alpha - This measures stock price volatility based on the specific characteristics of the
particular security. As with beta, the higher the number, the higher the risk.

Alpha = [(sum of y) - ((b)(sum of x))]n

38

Where:
n = number of observations (36 months)
b = beta of the fund
x = rate of return for the market
y = rate of return for the fund
An alpha of 1.0 means the fund outperformed the market 1%.

Sharpe ratio - This is a more complex measure that uses the standard deviation of a stock
or portfolio to measure volatility. This calculation measures the incremental reward of
assuming incremental risk. The larger the Sharpe ratio, the greater the potential return.

Sharpe Ratio = (total return - risk free rate of return)

Look

Out!

The reverse of "the larger the Sharpe ratio, the greater the return" also holds true. The "lower the
Sharpe ratio, the lower the potential return". If a security\'s Sharpe ratio were equal to "0", there
would be no reward for taking on the higher risk, and the investor would be better off simply
holding Treasuries (whose return is equal to the risk-free return component of the equation).

(b) Reduction of portfolio risk through diversification Strategies

39

Diversify Your Portfolio With Commodities

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Reducing Risk through Diversification

You're planning a visit to San Francisco. What do you pack? Suntan lotion or an umbrella? You
do a little research. You check the weather forecast. But even though the prediction calls for
sunshine and warm temperatures, you bring along the umbrella and rain gear just in case. Your
suitcase may be heavier, but you'll be prepared, rain or shine!
This principle of covering your bases holds true with your investment portfolio, as well. Most
investors avoid putting all of their money into one investment. Too risky. A well-balanced
portfolio will consist of different asset classes and a variety of investments within each asset
class. That's diversification.
Smooth out the ups and downs
Since different investments tend to rise and fall in value at different times and for different
reasons, diversification can help smooth out the inevitable ups and downs of the markets.
Diversification also helps to reduce risk. By distributing your money across different asset
classes and investments, you reduce the risk of being hurt by poor performance in any one
particular investment.
You might be wondering how high are the peaks and how low are the valleys if you were not to
diversify but invest in exclusively one asset class. The chart below illustrates how the asset
classes have fluctuated and the average return over the last 30 years.
Source: Standard & Poor's The chart returns above are based on historic performance of market
indices for the period 1/1/1980-12/31/2009 and do not represent performance of any specific
investment funds. Stocks are represented by the total returns of the S&P 500, unmanaged index
40

generally considered representative of the U.S. stock market. Bonds are represented by the
Barclays Aggregate index, a broad based index maintained by Barclays Capital often used to
represent high grade government and corporate US bonds. Short-Term Investments are
represented by a composite of the yields of 3-month Treasury bills, published by the Federal
Reserve, and the Barclays 3-Month Treasury Bills index, a market value-weighted index of
investment-grade fixed-rate public obligations of the U.S. Treasury.

When you diversify, you spread your investment dollars among a variety of investment classes.
This strategy helps to smooth out your total portfolio performance: the good performance of
some investments may offset the not-so-good performance of others.
What's the flip side? If you have some stellar performers in your portfolio, your total return may
be weakened by poorer performing investments. As you can see, reducing the risk of investment
losses also means giving up some of your potential gains. But when you consider how much you
could lose when you lump your money into just a single investment, especially during volatile
times when the market drops significantly, you may be willing to accept more "middle-of-theroad" returns in exchange for the relative stability which diversification offers. Regardless of the
type of investment you have, it is likely to be affected by what's happening in the major markets
as well as overall economic factors such as interest rates, the growth rate of the economy, the
inflation rate and unemployment.
You should consider diversifying among a variety of asset classes as well as among a variety of
investment strategies. This includes the types of securities the fund invests in (large company
stocks, foreign stocks, government bonds, etc.), the particular investing style the fund manager
uses, such as growth investing or value investing, and specific techniques the manager uses to
select securities. You may find that certain investing styles fit in with your philosophy better than
others.
As it relates to investing styles, the "strategy" is the basic philosophy or investment approach

41

used by a fund's portfolio manager. Because every portfolio manager is different, investment
styles vary from one fund to the next - sometimes subtly and sometimes dramatically. Just as it's
important to diversify your investments among asset categories such as stocks, bonds and cash
equivalents, it's also important to diversify by investment management strategies. Doing so will
help you take diversification to a higher level, and may also help you to maximize returns while
minimizing risk.
To learn more about the different investment strategies, access the following links below:

Diversification

Diversification and asset allocation

It's important to make a distinction between diversification and asset allocation. Asset allocation
is the percentage of your total account value in each asset class-stocks, bonds, and short-term
investments. Diversification is spreading your money across many different investments, either
within a particular asset class (large company stocks, mid-sized company stocks, small company
stocks, etc.) or among various asset classes. So it's possible to have a diversified portfolio that is
100% invested in stocks.
At first, you might be confused more about the concepts of diversification and asset allocation,
so you may want to review them in greater detail. This site is one of many tools available to help
you learn about diversification. You can supplement the information provided with other sources
such as personal investment magazines and books, the financial section of local and national
newspapers, and commercial web-sites. A consultation with a financial planner may be necessary
to determine what is right for you.
Using Diversification/Asset allocation as part of your investment strategy neither assures nor
guarantees better performance and cannot protect against losses in declining markets.

Conclusion

42

We've introduced many topics in this tutorial:

Reinvesting your earnings allows you to take advantage of compounding.

Each investor is different in his or her objectives and risk tolerance.

There isn't just one strategy that can be used to invest successfully.

Each investment vehicle has its own unique characteristics.

Diversifying investments in a portfolio helps to manage risk.

Together, all these points make up a foundation of knowledge with which any investor should be
comfortable. However, these concepts mean nothing unless you can put them into practice. It's
great to know that compounding accelerates your investment earnings, but the real question is
how do you take advantage of compounding and actually make money? In this section we'll go
over an example that demonstrates how to put all of what you've learned into action.
The Strategy
For our example, let's look at a fictional investor named Melanie. Melanie is a twenty-something
who is relatively new to investing. Melanie knows that she wants to invest, but isn't sure just how
to do it. Her knowledge of finances is good, but she has no desire to spend her free time poring
over financial statements (or losing sleep because of her investments).
After checking out this tutorial and reading more about stocks and mutual funds, Melanie learns
that there are two basic styles of portfolio management: passive and active. Each of these styles
results from a different approach to the market. The goal of active management is to select
securities that will perform better than the overall market. For example, when a mutual fund
manager analyzes a company's financial statements t

43

REFERANCE
Attribution: A Guide to What it is, How to Calculate it, and How to Use it. USA: McGraw
Bodie, Kane,Marcus, Investments, 7thedition. New York: McGraw Hill/Irwin, 2008
Campisi, Stephen. Primer on Fixed Hills, 2003 o determine if the stock is suitable for the
fund, he or she is actively managing the portfolio Income Performance Attribution, Journal of
Performance Measurement: Summer 2000: 14-25
Fabozzi, J.Frank, Bond Markets, Analysis and Strategies. 4thedition. New Jersey: Prentice
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Feibel, Bruce J. Investment Performance Management, New Jersey: John Wiley & Sons, Inc.,
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Haight, G. Timothy, Morrel, and Ross, How to Select Investment Managers & Evaluate
Performance: A guide for Pensiun Funds, Endowments, Foundations, and Trust. New Jersey:
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Ross, Stephen A., Westerfield, Randolph. W., Jaffe, Jeffrey F. and Jordan, Bradford D.
Modern Financial Management. 8thedition. New York: McGraw-Hill, Inc., 2008.

44

INDEX
CHAPTER

TOPIC

PAGE NO.

N0.

Q.1)
Q.2)

Q.3)

ASSINGMENT NO:1
INVESTMENT ENVIRONMENT AND CRITERIA
WRIT ON THE FOLLOWING
a) TYPES OF INVESTMENT
b) OBJECTIV OF INVESTER
c) INVESTMENT V/S SPECULATION
d) INVESTMENT V/S GAMBLING
INVESTMENT AVENU AND
FACTER INFUANCING ON

1
5
8
12
13

SELECTION OF INVESTMENTALTERNATIVES
ASSINGMENT NO:2
Q1)
Q.2)
Q.3)
Q.4)
5)
6)

MEANING OF RISK ,TYPES OF RISK , SYSTEMATIC AND

UNSYSTEMATIC RISK
ANALYSES DATA .STANDER DEVIATION AND VERIANCES
PORTFOLIO AND EXPECTED RETURN ON PORTEFOLIO
WRITE ON FOLLOWING
a) RISK OF PORTFOLIO
b) REDUCTION OF PORTFOLIO
CONCLUTION
REFERANC

45

17
26
31
36
38
41
42