Page 8 - DCOM507_STOCK_MARKET_OPERATIONS
P. 8

Unit 1: Basics of Investment




          Thus, government securities would be seen as risk-free investments because the probability of  Notes
          actual return diverging from expected return is zero. In the case of debentures, say of a company
          like TELCO or GRASIM, again the probability of the actual return being different from the
          expected return would be very little because the chance of the company defaulting on stipulated
          interest and principal repayments is quite low. You would obviously put equity shares in the
          category of ‘high risk’ investment for the simple reason that the actual return has a great chance
          of differing from the expected return over the holding period of the investor which may range
          from one day to a year or more.
          Investment decisions are premised on an important assumption that investors are rational and
          hence prefer certainty. They are risk averse which implies that they would be unwilling to take
          risk just for the sake of risk. They would assume risk only if an adequate compensation is
          forthcoming. And the dictum of ‘rationality’ combined with the attitude of ‘risk aversion’ imparts
          to investment their basic nature. The question to be answered is: how best to enlarge returns
          with a given level of risk? Or how best to reduce risk for a given level of return? Obviously,
          there would be several different levels of risk and different associated expectations of return.





            Notes  The basic investment decision would be a trade-off between risk and return.
          Self Assessment


          Fill in the blanks:
          1.  .................................... is the process of meeting your life goals through the proper
              management of your finances.

          2.  .................................... decisions are premised on an important assumption that investors
              are rational and hence prefer certainty.
          3.  ...................................., is the probability that the actual return on an investment will be
              different from its expected return.

          1.2 The Investment Process

          After understanding the concept of investment and the nature of the investment decision you
          might now like to know as to how does an investor go about the task or business of investing?
          How much to invest at any moment? And when to make or unmake the investment? These
          questions essentially relate to the investment process which is briefly outlined in this section.
          A typical investment decision undergoes a five step procedure which, in turn, forms the basis of
          the investment process. These steps are:
          1.  Determine the investment objectives and policy
          2.  Undertake security analysis
          3.  Construct a portfolio

          4.  Review the portfolio
          5.  Evaluate the performance of the portfolio
          You may note at the very outset that this five-step procedure is relevant not only for an individual
          who is on the threshold of taking his own investment decisions but also for individuals and
          institutions who have to aid and work out investment decisions for others i.e., for their clients.





                                           LOVELY PROFESSIONAL UNIVERSITY                                    3
   3   4   5   6   7   8   9   10   11   12   13