Risk and Investment

Risks and Investment


a) Provide a review of the most important risk measures available for assessing the risk of a portfolio. Explain what the advantages and disadvantages of each metric are? Give an overview of the latest regulatory guidelines in terms of which measures to use and which ones to decommission, and the rationale behind these guidelines.

b) Give an overview of the main types of orders you can have within a financial market, in terms of executing a transaction. Discuss the roles of brokers and dealers within these markets. Explain the characteristics, similarities, and differences in each case.

c) You are running a crypto-currency fund which reports performance results in US Dollars. Is this compatible with the notion of cryptocurrencies as money?

Question 2.

a) Within a paragraph, explain the differences between passive and active investments. What are the advantages and disadvantages in both cases? What type of investor risk profile would be best for an active investment and similarly for a passive one? Do you know any other types of investment styles in between?

b) Within a small paragraph, explain the Capital Asset Pricing Model (CAPM). Explain the goal of the model, and the assumptions made in order to achieve the CAPM formula.

c) Within a paragraph, explain the reasons investors would choose to invest in assets that offer guaranteed negative returns. Examples of these assets are certain government bonds and cash bank accounts.


a. Risk management

Risk management is a crucial investment decision-making process. The process comprises identification, analysis, and acceptance of or mitigation of the level of risk associated with an investment. Some popular risk measurements include probability distribution, beta, risk value (VaR), and risk conditions. The actions include; Standard deviation quantifies data deviation from its anticipated value. A coefficient of variation is utilized to decide the amount of investment’s historical data relative to its yearly return rate. It shows how much the present return deviates from its anticipated usual past returns. For example, a stock with a significant variance is more volatile, and so the store is linked with a higher amount of risk.

Secondly, the Sharpe ratio gauges the performance of the risk-adjusted. It is achieved by subtracting experienced return rates on investment on risk-free securities like a US Treasury Bond. It divides by a standard deviation from the related asset and indicates whether the income from the investment is because of prudent investment or because an additional risk is assumed.

The Sortino ratio is a variant of the Sharpe ratio, which eliminates the impact on standard deviations
of higher prices, with the focus on distributing returns that are below or require returns. The  Sortino ratio additionally replenishes the risk-flow rates with the necessary return in the formula numerator, thereby reducing portfolio returns by dividing the returns under the goal or the needed return. There are no complete evidence techniques, and therefore generally, many approaches are combined. Volatility is the most prevalent risk proxy – yet volatility does not reflect hazards. The conventional method for measuring volatility is the probability distribution.

That applies to assets and portfolios (Neyland, 2018). The portfolio return may be measured simply by aggregating weighted returns. It is a little more complex to calculate the standard deviation from a portfolio. As the square root of the return variance, a portfolio’s historical standard difference may be computed. However, to compute the anticipated volatility, each asset’s dispersion or the correlations must be included.

b. Market order and financial Market

An order for the market is to purchase or sell securities instantly. This kind of order assures that the order is carried out but that the implementation price is not guaranteed. A market order usually executes at the current tender (for an order), or requests a purchase order at or around the current tender price. However, it is crucial to keep in mind that the final transacted price is not always the price to be used to execute a market order. A limit order is a purchase or sale order at or better a specific price (Neyland, 2018). A purchasing limit can be implemented only at or below the limit price, and a selling limit can only be implemented at or above the limit price.


A good example is when an investor wishes to buy XYZ stock shares for a maximum of $15. The investor may order the amount, and that order only executes if the XYZ inventory price is $15 or less. A stop order, also known as a stop-loss order, is a purchase or sales order when the inventory price, known as the banking and financial, reaches the set price. A stop order will become an order of the marketplace when the stop price is achieved. At a stop price above the current price, a shopping stop order is entered. Investment professionals use a shopping stop order to restrict a decline or to safeguard a profit from the short sale of stocks. At the stop price below the market rate, a stop order is executed. Investors commonly use an order to halt selling
to minimize a loss or safeguard a profit on their investment. In the financial business, broker- dealers serve numerous essential tasks. Investment advise, the provision by the market of liquidity, the facilitation of trade operations, the publication of research on investments, and the raising of money for firms, all of these (Laksmana & Yang, 2015). Brokerage firms vary in size from significant subsidiaries of substantial commercial and investment banks to miniature independently owned storehouses.

c. Crypto-currency

Cryptocurrencies are money as they enable two-party trade and function as a valuable store. However, the conventional monetary system cannot give its features: cryptocurrency may be expended and received by anyone, anywhere, anywhere in the world at any time and without the necessity for a bank or financial institution. Cryptocurrency is the most innovative feature. In addition, fiat money is essentially debt. When a banking system prints banknotes, you, the consumer, issue a part of your government’s debt concurrently. Consider how the EU and the US, for example, are creating money. When loans are taken out, the most significant money, an administration produces. When people keep borrowing, banks build money. If no loans were taken off, perhaps no currencies would be in currency, too. Take the US dollar instance. In other words, the US currency would not be present globally without customers taking out loans to banks. While fiat currency looks to get a large share of its debt value, Bitcoin does not (Liu & Tsyvinski, 2021). Further, the trust of his collective, Bitcoin, has intrinsic worth. Bitcoin does not rely on a debt structure, but its worth depends on the exchange’s effectiveness.

It is hard to anticipate which tokens or currencies will become the hottest months, weeks, and even days in the ever-shifting virtual currency industry. Indeed, as new coins are produced constantly, it can be impossible to anticipate which cryptocurrency will exist. In addition to this inherent unpredictability, huge volatility afflicted investors in crypto-currency areas. It will be confirmed by an insight into bitcoin's historical price over the last year. Investors that had formerly resisted the emerging industry at that time began to notice. While price volatility for Bitcoin continues, there remains a strong interest in virtual currencies that can have a more stable value by being somehow connected to other valuable assets such as gold. As a result of this, and maybe also fueling this desire, increasing numbers of programmers for cryptocurrency have been established or planned, which are connected with precious metals, the dollar, and other paper money, which may create more stability than other virtual currencies (Chuen et al., 2017). Digital currencies are tied together and can be used to evaluate gold and USD alternatives……..

Question 2

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