INVESTMENT ANALYSIS – ATTITUDE OF INVESTORS TOWARDS RISK

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 Take this question serious and read them over and over again:

QUESTION:

What Government Put in place for investment conducive for investors

SOLUTION:

CREATING CONDUCIVE ENVIRONMENT FOR INVESTMENT GROWTH

For investment to thrive, it is necessary that the federal government creates a veritable environment capable of attracting investors as well as boosting already existing businesses by;

i.             Favorably policies for investor i.e. tax holidays

ii.           Fighting corruption in the country

iii.         Fighting insecurity

iv.          Putting good infrastructures in place like light, good roads, waters, etc.

 ATTITUDE OF INVESTORS TOWARDS RISK

ILLUSTRATION:

There are undoubtedly individuals who love or prefer risk and there are others who are indifferent to it. Both logic and scientific observation suggest that most investors and investment manages are predominantly risk averters.  What do you think is the most logically satisfying reason for this?

SOLUTION:

A risk lover is one who prefers risk, giving chance between more or less risky investment with identical expected return will prefer the most risky investment to the less risky one.  Faced with the same choice, the risk avert will select the less risky investment.

The person who is indifferent will not care which investment he receives.  The theory that has come to be accepted as capable of explaining risk aversion is generally known as the UTILITY THEORY.  Most people appear to have dealing with marginal utility for money.   This directly affects their attitude towards risk.  This is so because, one gets pain from loss than the amount of pleasure derived from N1 gain.   Technically, diminishing marginal utility implies that utility increases as wealth increases and at a declining rate. If we have the notion of diminishing marginal utility of wealth, it follows that a person’s utility will decrease more with a loss of N1 in wealth than it would increase with a gain of N1.

QUESTION:

What is the relationship between investment, savings, and interest:

ANSWER:

There is negative relationship between interest rate and investments. As interest rate falls investment rises. And the opposite is true when interest rate rises.
Real interest rate helps to determine the trend of investment in an economy. When the interest rates are high, borrowing becomes quite expensive for the investors so they make less real investment. The high interest rates make it difficult to cover their expenditure because their products becomes less competitive in both the domestic and international market.
On the other hand, if the interest rate is low, more and more investment take place in the economy which result in more production, more employment opportunities and increase in the potential GDP. Thus the real interest rate through their effect on investment improves growth and future living standards of a nation.