Unfortunately, there are no such things as risk free
investments. Usually, the higher the risk an investment proposes the higher the
gains it can give to investors, if it is successful. The flipside side is that
there is a higher chance that the investment fails and your money is lost.
To calculate the risk involved with investments risk management is undertaken to try and more accurately consider the factors which
affect an investment. By analyzing market and credit risks that the bank or its
customers take on their balance sheets during transactions or trades, risk can
be assessed and managed.
Market risk is assessed by reviewing trading activities by
using the VaR model giving hedge fund information to the managers. Depending on
the bank there could be operational, country and other risks.
In capital market transactions or investments which involve
debt structuring, loan amendments, leveraged buy-outs, exit finances, measuring
credit risk solutions is critical.
Hedge fund firms such as Moore Capital Management, owned by
Louis Bacon, use the ‘investable index’ which is the hedge fund’s version of
the FTSE 100 share index. This allows them to calculate risks of investments by
using qualitative strategies (using the manager’s judgement) or quantative
calculations using computer programmes.
In simplistic terms, risk for the investor should be
calculated by the amount of money required to be invested and whether they can
afford to lose that amount. Yes, the potential rewards may be huge but if the
event of success is so slim then it shouldn’t even be considered an investment
opportunity.
Investment is a form of gambling, there are no sure things.
By building a portfolio of investments which combine high risk and low risk
investments it might lower the amount you could see returned in profits but it
will also dramatically the reduce the risk to your investment.
Like a bank account, interest on investment often depends on
the length of time you are willing to commit to the investment. Any less than
five years and you might have to accept that only a riskier investment will
offer the types of returns you are looking for.
Advice should be sought before making an investment with an
independent financial advisor. This way they can help draw up a profile as to
the type of investor you are and try to find projects which match the level of
risk you are prepared to accept.