x

Start investing with a
free Kristal.AI account.

icon

Simple. Secure.

*Error message

Risk Assessment Steps for New Investors

Updated on 24 Feb 2020

If personal financial planning helps you set goals, it is important to use the risk assessment steps to chart a course to achieve said goals. The word ‘risk’ always sounds scary but doesn’t need to be. With this article, you’ll have a more detailed understanding of risk assessment and why it is helpful.

Introduction

Portfolio managers use a range of different techniques when it comes to risk management. Some of these include the following:

1.Conditional Value at Risk (CVaR)
2. Credit Analysis
Risk Assessment for Investments
Measuring Risk
The Final Word for Investors

Introduction

Risk assessment is an essential aspect of investment as it helps individuals as well as financial advisors determine the overall likelihood of being exposed to losses on any investments, assets or even loans. Therefore, assessing the risk goes a long way in helping investors determine whether a certain investment is even worthwhile, and whether there are steps that can be taken to mitigate the risk in general. Additionally, it also shows investors the rate of return to be expected in order to make the investment a successful one. This step is one of the most crucial ones to be carried out before making any investments.

Portfolio managers use a range of different risk assessment steps when it comes to risk management. Some of these include the following:

1. Conditional Value at Risk (CVaR)

CVaR helps managers quantify the tail risk of any investment. It is calculated by looking at the weighted average of any extreme losses incurred in the tail end of the distribution of returns, after the cutoff point kept in place to calculate the value at risk (VaR). CVaR thus helps with risk management.

CVaR mainly addresses any shortcomings in the VaR model. Though the VaR may be a sufficient indicator of risks when looking at investments that have had a stable run, the model is unable to offer valuable insights for investments that have seen a bit of volatility. Due to this, it becomes quite challenging for advisors to offer astute judgements to their clients. This is where the CVaR model comes into play.

In layman’s terms, VaR presents what would happen in the worst-case scenario. CVaR presents what would happen if the threshold for the worst-case scenario is crossed. In a way, this creates a much better scope for risk management and assessment as one always has an idea of what to expect.

2. Credit Analysis

On the flip side portfolio managers also conduct their share of risk analysis regarding the companies issuing securities by performing a credit analysis. A credit analysis checks whether the company would be able to fulfil its debt obligations as well as the overall level of risk that is associated with investing in that particular avenue. In order to do so, analysts use a variety of tools such as financial projections, trend analysis, financial ratios and even cash flow analysis. They also review the collateral and credit scores.

One of the metrics used to determine the risk associated with investing in a particular financial product is debt service coverage ratio, DSCR, which is the total amount of cash flow that is available to pay any current debt obligations like principals, lease payments and interest. If an entity has a DSCR of under 1, then that means that its cash flow is in negative numbers. For instance, if a company has a DSCR of 0.89, this means that its net income can only pay off 89% of its debts and may just end up leaving its customers in the lurch.

Risk Assessment Steps for Investments

There is no investment product that is without any risk, and this is something that most investors accept when pooling in their funds. However, risk assessment helps them evaluate whether the total risk that is associated with their investment aligns with their risk appetite. An investor that does not want to go for high-risk avenues and would rather have the security of a low-yield security by their side, would be able to make decisions based on the risk assessment provided for different financial products. This can help financial advisors narrow down investment options based on what they know their clients are more likely to choose.

Measuring Risk

One of the most common ways used in order to measure the risk associated with a financial product is through the standard deviation, which measures the total dispersion around a specific performance benchmark. In order to calculate this, analysts look at the average performance of the product, and then calculate the standard deviation from there. If they see a bell curve, it means that the ROI would be as expected, with a standard deviation of 1. In this way, investors can evaluate their risk numerically to know what they can gain.

The Final Word for Investors

One of the most common risk assessment steps associated with a financial product is through the standard deviation, which measures the total dispersion around a specific performance benchmark. In order to calculate this, analysts look at the average performance of the product, and then calculate the standard deviation from there. If they see a bell curve, it means that the ROI would be as expected, with a standard deviation of 1. In this way, investors can evaluate their risk numerically to know what they can gain.

Disclaimer

The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.

cross
Change your country to India?

You’re now visiting Kristal.AI Worldwide.
To explore diverse offerings in Indian and global products, select India as your country.

ind

India

hkg

Hong Kong

sgp

Singapore

global

Other
Accredited Investor Declaration

This is offered only to Accredited and Institutional Investors as defined under the Securities and Futures Act, Chapter 289 of Singapore (“Act”), which broadly comprises of regulated financial Institutions, large corporates, high net worth individuals and sophisticated investors.

An Accredited Investor is an individual
  • Whose net personal assets exceed in value SGD 2 million (or it’s equivalent in a foreign currency) with value of his/her primary residence capped at SGD 1 million, or
  • Whose financial assets (net of any related liabilities) exceed in value SGD 1 million (or it’s equivalent in a foreign currency), or
  • Whose income in the preceding 12 months is not less than SGD 300,000 (or it’s equivalent in a foreign currency)

I agree to opt-in as Accredited Investor and will submit required documentation to confirm the same.

< Back Proceed as Private Wealth

Wealth Management Solutions
THEMATIC STRATEGIES

Enabling clients to invest in trending themes like FAMANGThe FAMANG Kristal invests in Facebook, Apple, Amazon, Netflix and Alphabet’s Google stocks. Assets are carefully chosen by an algorithm in order to deliver a superior returns based on past performance. The strategy is rebalanced every quarter., TECHGlobal Technology ETFs is a genetic algorithmic strategy focussed specifically on the Technology sector., ESGProvides exposure to higher rated environmental, social, and governance (ESG) companies while accessing large- and mid-cap stocks in Europe, Australia, Asia and the Far East., etc. with a single click or just create your own thematic basket.

Future-proof your portfolio and capture emerging investment themes.

OVERVIEW

Explore and Identify

Select from a range of expertly designed trending and diverse themes

Efficient Execution

Enabling easy exposure to your preferred themes without the hassle and costs of individual security selection and execution

Only the Best

A ready-made collection of Kristals that derive the best of the specific asset class or theme

Unique Mix

An optimised blend of ETFs and individual counters, enhancing efficiency and profitability

Contact our Relationship Manager
ALTERNATIVE INVESTMENTS

Diversify your portfolio with exclusive Private Equity, Pre-IPO deals, VC Funds & other investments like Bitcoin, Gold, Hedge Funds and many more.

Kristal fractionalizes difficult-to-access deals and opportunities.

OVERVIEW

Instant Access

A wide range of alternative asset classes such as Gold, Bitcoins, Hedge Funds and many more; readily made available

Risk Management

Enables investments in diversified assets hence spreading the risk

Easy Tracking

Enables you to get a consolidated view of investments in all assets at one place, hence facilitating easy monitoring and tracking

Exclusive Deals

Access to exclusive Venture Capitalist, Startup as well as pre-IPO investment opportunities

Low Investment Tickets

Facilitates fractionalization of investments in deals

Contact our Relationship Manager
FUNDS PLATFORM

Professionally managed funds with active investment strategies, screened for you by our investment committee to diversify your portfolio.

Enabling clients to access exclusive investment strategies. View Funds

OVERVIEW

Access

Provides Access to Professional Fund Managers

Low Investment Tickets

Facilitates fractionalization of investments in funds

Diversity

A wide spectrum of investment strategies ranging from Arbitrage to Credit to Hedge Funds and many more

Fees

No additional costs are charged by Kristal.AI

Exceptional Performance

Funds with an impressive track record and potential for high profitability

Leverage

Benefits from insights of the expert selection and advisory team

Easy Management

No time consuming management of portfolios

Contact our Relationship Manager
TAILOR-MADE PRODUCTS

Customize products based on your market outlook and specific needs across equities, bonds, gold and more.

For investors looking to enhance portfolio yield based on market views.

OVERVIEW

Enhanced Earnings

Structures with potential to enhance portfolio yield based on market movements

Customization

Product features can be designed to articulate investor views

Fees

A flat and transparent fee structure like nowhere else

One-Click Access

A single feature ‘Ideas’ enables you to access recently launched and trending market opportunities

Contact our Relationship Manager
BUILD YOUR OWN KRISTAL

Can’t find what you are looking for? Create your own exclusive investment strategy with risk management & periodic reporting.

For seasoned investors who prefer to design their own portfolio.

OVERVIEW

Empowered Investing

Enables clients to create their own custom portfolio based on their unique needs

Unlimited Choice

Access to all possible exchange traded assets

Flexible Management

Flexibility in delegating the portfolio management role to us or actively taking up the day to day investment decisions, in your custom Kristal

Custom Fee Structure

A simple, transparent and a customized fee structure

Access to Expertise

Custom performance reporting as well as advisory support

Contact our Relationship Manager