To understand why firm investment is risky, we must first ask ourselves if firm investment is really risky. To simplify this question, we can break it down into two sub-topics: Firm Investment Strategies and Public Sector Investment Strategies. A firm investment strategy refers to those investment strategies adopted by specific firms. An example of such an investment strategy might be a corporate real estate fund. On the other hand, a public sector strategy refers to those investment strategies adopted by governments at the national level.
When investing, we all want to make sure that our money is secure. That said, there are times when any given investment makes sense-even when a given firm is making firm investments that are considered as risky. So, how do we know whether a given investment is risky or not?
One approach that is being taken by many investment managers is to look for a certain amount of value in a given firm. With the advent of more complex market operations, more firms are becoming involved in international trade. As more firms try to exploit the benefits of trade flows, more value can be added to firms’ assets.
Thus, as the returns to capital investments rise, portfolio risk has also gone up. If the return to capital increases, portfolio risk also goes up. This is where the role of portfolio asset allocation becomes very important. The goal of asset allocation is to ensure that the return to the portfolio does not outnumber the risk-return ratio. The idea is to create a portfolio that uses appropriate amounts of highly liquid assets (like equities) and safe fixed income securities (like bonds).
However, what happens when the risk-return ratio exceeds the optimal level? If a firm’s assets are spread across many different types of debt and other financial instruments, then the portfolio will have to undergo significant drawdown over time. To avoid this problem, managers of managed funds and other portfolio management strategies try to keep the risk-return ratio as close to zero as possible. In addition, they attempt to diversify the portfolio by not concentrating it too much on any one particular asset.
Managed funds can be used as part of a comprehensive portfolio management strategies. This may include stock options, derivatives, mutual funds, or perhaps a real estate fund. The key idea is that managed funds try to reduce drawdown by spreading risk over a wide range of assets. Of course, this is just the tip of the iceberg when it comes to the world of managed fund investment strategies.
