Risk Exposure & The BOTS app
Risk Exposure and The BOTS app
In finance, risk refers to the chance that an investment's actual return will be different from its expected return. It includes the possibility of losing some or all of the original investment. In other words, when we talk about risk in financial terms, we're usually talking about it in relation to return on investment (ROI). As a general rule, higher-risk investments have a higher potential ROI but also a greater chance of loss.
Risk exposure in investing is simply the risk of losing the amount of money an investor has put into an investment (stock, bond, cryptocurrency, etc.). For example, you've invested $3000 in Ethereum, so your risk exposure to ETH equals $3000. Then let's assume that you also have Bitcoin in your portfolio where you put $6000 and Apple shares were purchased as well with an investment of $1000. If we wanted to measure how much of your entire portfolio is exposed to what - we would refer to it using percentages. Here, the total value of your portfolio is $10,000. Your ETH exposure comprises 30% while BTC fills 60% and 10% for Apple stock.
Diversification of investment portfolio as a hedge against risk
Achieving investment goals often requires taking on some level of risk. However, diversification is a powerful tool that investors can use to help hedge against potential losses. By spreading your investment dollars across different asset classes, industries, and even geographic regions, can help you reduce the overall risk in your portfolio. While no investment is completely immune from loss, a diversified portfolio can help weather market volatility and potentially achieve your long-term investment goals.
The Benefits of Diversification
Several potential benefits come with diversifying your investment portfolio, including:
1. Reduced Volatility: By spreading your investments across different asset classes, you can help reduce the overall volatility of your portfolio. This can make it easier to stay disciplined and stick to your long-term investment strategy during periods of market turmoil.
2. Enhanced Returns: While diversification does not guarantee higher returns, a well-diversified portfolio has the potential to outperform a narrower portfolio over time. This is due to the fact that different asset classes often move in different directions, providing opportunities for offsetting gains and losses.
4. Greater Flexibility: A diversified portfolio can also provide you with greater flexibility. This is because you can adjust your asset mix to target specific investment goals or objectives.
In conclusion, risk is an important factor to consider when making any investment. While it's impossible to eliminate risk, diversifying your portfolio across different asset classes can help reduce overall volatility and potentially enhance returns over time. By understanding your risk exposure and taking steps to diversify, you can help keep your investment portfolio on track to achieving your long-term financial goals.