Risk Management and Investment Strategies

### Risk and Return

• Different financial products offer different returns.
• Returns can vary due to risk or volatility.
• Risk or volatility is the difference between actual and expected returns.
• Risk can be measured using standard deviation.

### Sharpe Ratio

• Maximizes returns for a given level of risk or minimizes risk for a given return.

### Risk Appetite

• Assess your risk appetite based on:
  • Ability: Your capacity to handle losses.
  • Need: Your need for returns and the time horizon of your investments.
  • Willingness: Your comfort level with risk.

###  Risk Tolerance

• A roller-coaster analogy is used to describe the importance of risk tolerance.
• If your investments are riskier than your risk appetite, you may panic and sell them during market downturns.
• Staying invested allows you to benefit from market volatility and business cycles.

Risk and Return

• Different financial products, such as fixed deposits, bonds, and shares, offer different returns.
• Risk or volatility is the difference between expected return and actual return.
• A simple statistical measure for risk is standard deviation.
• The Sharpe ratio maximizes return for the same risk or minimizes risk for the same return.

Risk Appetite

• Understanding your risk appetite is essential for successful investing.
• Risk appetite is assessed on three dimensions: ability, willingness, and need.
• Ability to take risk is based on factors like age, dependents, and financial situation.
• Willingness to take risk is influenced by personality and comfort level with risk.
• The need to take risk is determined by financial goals and time horizon.
• If an investment is too risky for your risk appetite, you may panic and sell during market downturns.
• Holding investments during market volatility can help to weather business cycles.

Understanding Risk and Return

• Different financial products offer varying returns, for example fixed deposits, bonds and shares.
• Expected return can differ from the actual return, this difference is known as risk or volatility.
• A statistical measure for risk is Standard Deviation, which is how much the actual return is likely to differ from the expected return.
• The Sharpe ratio is a measure of risk-adjusted return, aiming to maximise return for the same risk or minimise risk for the same return.

Risk Appetite

• Risk appetite is the degree of risk an individual is willing and able to accept.
• Three factors influence risk appetite:
  • Ability: Your ability to take risk is influenced by factors such as your financial situation and dependents.
  • Need: If you have the need and ability to take on risk, but find it unsettling, your willingness is low.
  • Willingness: This is your emotional capacity to handle risk.
• A high risk appetite leads to investment in higher risk products - such as stocks - but may result in panic selling when the market declines.
• Staying invested, even during market volatility, is essential to achieve long-term investment goals.

Risk and Return in Investing

• Different financial products, such as fixed deposits, bonds, and shares, offer different returns.
• The expected return is the anticipated return on an investment.
• Actual return can differ from expected return due to risk or volatility.
• Risk can be measured using the standard deviation of returns.
• The Sharpe ratio measures the return relative to the risk.
• Maximizing the Sharpe ratio aims to maximize return for the same risk or minimize risk for the same return.
• Risk appetite influences investing success.
• Assess risk appetite based on ability, need, and willingness to take on risk.
• Investment-grade bonds are a lower-risk investment option.
• Holding investments through market volatility and business cycles is essential.
• Panic selling can lead to losing investments.
• Portfolio diversification is key to managing risk.