4.32 Investment risk analysis. The risk of a portfolio of financial assets is sometimes called investment risk. In general, in- vestment risk is typically measured by computing the vari- ance or standard deviation of the probability distribution that describes the decision maker's potential outcomes (gains or losses). The greater the variation in potential outcomes, the greater the uncertainty faced by the decision maker; the smaller the variation in potential outcomes, the more predictable the decision maker's gains or losses. The two discrete probability distributions given in the next table were developed from historical data. They describe the potential total physical damage losses next year to the fleets of delivery trucks of two different firms. Loss Next Year $0 500 NW 1,000 1,500 2,000 2,500 Firm A 3,000 3,500 4,000 4,500 5,000 Firm B Probability Loss Next Year $0 200 .01 .01 35 .30 .02 .01 .01 .01 700 1,200 1,700 2,200 2,700 3,200 3,700 4,200 4,700 Probability 00 .01 .02 .30 .30 .02 01 a. Verify that both firms have the same expected total physical damage loss. b. Compute the standard deviation of each prob- ability distribution and determine which firm faces the greater risk of physical damage to its fleet next

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Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.