How to Calculate Financial Risk Finance
The three basic components of any investment in terms of its risk are a) the cost of capital; b) the basic ability to meet fixed costs at a timely manner; and c) the ability to maintain and grow equity. These are the three basic variables that determined the nature of risk in any kind of investment. This short piece will attempt to simplify this. The steps below are based on the availability and realism of these three variables.
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Instructions
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1
Calculate your time horizon. This is based on the amount of time you have for an investment to stay invested. Short term investments are riskier than long term ones simply because a long term investment gives more time for the investor to recoup any losses.
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2
Calculate your risk tolerance. This is the most subjective of all calculations. The basic idea is simple: how much can you afford to lose? This is important before any investment decisions are made. It is clear that those with lower tolerances should make sure to look at long term investments first.
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3
Calculate the nature of your asset allocation. This is a method that groups the type of investments as low, medium or high risk. High risk investments are found in futures and options. Medium risk is in real estate or mutual funds, while low risk investments can be found in government bonds, money markets or CDs. Once you go through steps one and two, this is the last criteria in your decision making process. Low tolerance should remain in CDs, while high tolerance can go into high risk, high profit investments such as options.
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