Page 63 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Personal Financial Planning

Notes Self Assessment

State True or False:
6. The primary risk you face with cash investments, including treasury bills and money
market mutual funds, is losing ground to inflation.

7. Morningstar, Standard & Poor’s, and Moody’s Corporation are examples of rating
companies in India.
8. Political turmoil in a particular area of the world does not play any significant role in
investing decision in that region.
9. Asset allocation is a useful tool in managing systematic risk because different categories
of investments respond to changing economic and political conditions in different ways.
10. Buying bonds with different terms, or maturity dates is a way to minimize risk in investment
by asset allocation.

Case Study Evaluating Investment Banking and Market Risks

nderstanding and being able to evaluate the investment banking market and its
risks is important for all investors. Investment banking helps companies find the
Ucapital needed to expand their business, bring new products to the market and
grow the economy. The investment banking system is important to the country’s economic
well-being and provides a tremendous value for all investors.
One element of investment banking involves the proper management of risk. Risks are
always present when investing and can never be eliminated. There are techniques that
investment bankers use to manage the risks associated with investing and to help investors
and the company’s they represent maximize their potential profits.
Elements of Investment Banking
Investment banking involves bringing market companies that seek to sell their stock to
the public. Investment bankers evaluate a company’s financial information, management
team and business to determine how best to introduce the company’s stock to the market
and provide the best price for that stock.
Investment banking involves both the initial and subsequent offer of a company’s stock.
The initial offering, which is known as the initial public offering or IPO, sets the initial
pricing for a company and provides it with the capital necessary to meet its business
objective. The investment banker, as the underwriter, will maintain an interest in the
company’s stock to sell to the public as part of the exchange market.
Nature and Types of Risk
The work of the investment banker to properly time the offer of an IPO, or secondary
offering, of a company’s stock is based on their evaluation of the market conditions. A
company’s stock is less likely to do well when investor’s expectations are lower due to an
economic hardship or concerns about inflation. The investment banker studies the economy
carefully to determine the best time to offer a company’s stock.

Risks associated with investing and bringing a company to market includes market risk,
credit risk, inflation or purchasing power risk and regulatory risk. Each of these risks is
Contd...

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