Question

You are a financial advisor and a client tells you he is concerned about the amount of risk in his portfolio. Assuming your client hasn’t already done them, what two things can you suggest to reduce your client’s risk? What additional information about reducing risk should you provide? Explain your answer

Answer 1

If my client wants to reduce the amount of risk in his portfolio I would suggest following two things to reduce the client's risk:-

( I ) I would suggest him to allocate a major part of his portfolio in non-risky investment instruments such as debt funds issued by the government authorities. Debt instruments issued by government authorities are one of the safest instruments of investment.

( II ) Another suggestion would be to invest in funds of only large corporations with very high rating of their debt instruments. This would also lead to significant lowering down of risk element in his portfolio.

It is important to understand that there is a trade - off between risk and return on investment. Higher the probability of return, greater the risk. In my opinion, one should have a balanced portfolio depending on one's appetite for risk and return.