Risk Management

Q1) Write short notes (any two)

Answer:

a) Investment Alternatives: An alternative investment is an investment in asset classes other

than stocks, bonds, and cash. Most alternative investment assets are held by institutional

investors or accredited, high-net-worth individuals because of their complex nature, limited

regulations and relative lack of liquidity. Alternative investments include hedge funds, managed

futures, real estate, commodities and derivatives contracts. Many alternative investments also

have high minimum investments and fee structures compared to mutual funds and ETFs. While

they are subject to less regulation, they also have less opportunity to publish verifiable

performance data and advertise to potential investors.

Alternative investments are favored mainly because their returns have a low correlation with those

of standard asset classes. Because of this, many large institutional funds such as pensions and

private endowments have begun to allocate a small portion (typically less than 10%) of their

portfolios to alternative investments such as hedge funds.

While the small investor may be shut out of some alternative investment opportunities, real estate

and commodities such as precious metals are widely available.

b) Mutual Funds as form of effective Indirect Investing:

Answer:

A mutual fund is an investment company that pools the money of various investors and buys and manages a

diversified portfolio of securities. The investors, or shareholders, buy shares of mutual fund, representing

ownership in all of the fund's securities. Investors share in the success, or lack of success, of the mutual fund

they buy in direct proportion to the amount of the mutual fund shares they own.

Mutual Funds are an effective Indirect Investing because of the following advantages:

1. Professional Management: They are professionally managed by well qualified professional. Investor

does not have time or the expertise to manage their...