23 October 2015

Multi-asset trading: The risk/reward premium

Why consider the risk/reward premium in multi-asset trading?

​​​​​​​​​​​​​​​Remember: Some investors may consider assets within a risk/reward trade-off. The higher the investment risk, the higher the potential rewards could be viewed as the risk worth taking. The lower the risk, you may expect a lower reward from holding the investment.


 
Critically asses which asset classes respond to your specific investment needs, based on the questions, and which mix of asset classes and underlying investments respond to your specific risk appetite and investment timeframe.

 
One part of your portfolio could contain higher-risk or more volatile investments with an expected risk/reward premium, while the other part of your portfolio could be invested in lower-risk, more stable assets. 

 
Those with bigger sums to invest and a longer time horizon may feel comfortable with a higher proportion of investment with a high-risk premium. This contrasts with those with smaller sums to invest and shorter time spans, who would have less time to recuperate any potential losses and would likely invest in lower-risk investments. 

 
Risk/return of asset classes
As a rule of thumb:
Equities are considered to be relatively higher risk. Company shares can fluctuate for a variety of reasons – specific to the company, specific to its industry sector, specific to the economy in which it’s based or trades, or because the equity market itself is in or out of favour.

 
By contrast Government bonds such as those issued by the UK Treasury are less riskier since as they are backed by central Government. That said they also offer the lowest potential return. On the fixed-income (bonds) side, these assets tend to exhibit a lower volatility compared to equities. 

 
However, the risk inherent in each investment may vary dramatically. 

 
For example: Equities (i.e. stocks) are higher risk than cash instruments (the largest risk to which is inflation). However, the risk profile of a developed country, large-cap stock in a defensive business sector is considerably less than a small-cap stock in a defensive business sector in a developing country.

 
The investment universe is vast – so start with investment areas you are most familiar with (for example, domestic investment products).

 

 

 

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.