Page 119 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes 6.4 Summary

An investment strategy that aims to balance risk and reward by designing a portfolio’s
assets according to an individual’s goals, risk tolerance and investment horizon.

There are three main types of asset classes – equities, fixed-income, and cash and
equivalents. The three asset classes have different levels of risk and return, so each will
behave differently over time.
When prices of different types of assets do not move in tandem, combining these
investments in a portfolio can help manage the variability of returns, commonly referred
to as “market risk.”

When you diversify your investments among more than one security, you help reduce
what is known as “single-security risk,” or the risk that your investment will fluctuate
widely in value with the price of one holding. Diversifying among several asset classes
may increase the chance that, if and when the return of one investment is falling, the
potential return of another in your portfolio may be rising.

Fundamental analysis is the process of looking at a business at the basic or fundamental
financial level.

Return on Assets is one of the most important metrics every investor should know. Return
on Assets (ROA) tells how efficiently (or inefficiently) a company turns assets into net
income. It is a way to tell at a glance how profitable a company is.

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of
financial assets over time, between the lender and the borrower.
There are various types of loans such as home loan, car loan, personal loan, education loan
etc to meet out varied financing needs of individuals.

6.5 Keywords

Asset Allocation : Asset Allocation is a method of diversification which positions assets among
major investment categories. This tool may be used in an effort to manage risk and enhance
returns. However, it does not guarantee a profit or protect against a loss.
Asset Classes: There are three main types of asset classes - equities, fixed-income, and cash and
equivalents. The three asset classes have different levels of risk and return, so each will behave
differently over time.
Loan: A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of
financial assets over time, between the lender and the borrower.

6.6 Review Questions

1. What do you mean by the term investment strategies?
2. What are asset classes? Name the various types of asset classes.

3. What are the various types of primary asset classes? Explain.
4. What do you mean by the term “asset allocation”? Explain its significance while making
a investment decision.

5. What is the role of diversification strategy in asset allocation?
6. What are the various types of loan options available in India?

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