Subject : Investment Anlysis and portfolio Management Literature Review : You are required to create a literature review for your final paper project by reviewing the existing literature to see what...

Literature Review
Investment Objectives – Risk Return Relationship
The objectives of the investments made by an individua can be explained by the risk and return relationship. We need to set our goals in terms of the returns that we desire on our investments. This helps us in taking major decisions regarding investments like which assets or securities should be included. Now this return does not come alone. For every return there is some risk assumed. In finance, it is said that for high risk we get high returns. This is because of an investor is taking high risk on any investment, then the returns on the investments should justify the risk assumed. For instance, there is no risk on the money deposited in the bank but at a same time the reward in form of returns is also very low. If an investor wants to double the money in five years, then the investor should be well aware that for such high returns the risk associated should also be very high.
It is very important to understand the nature of the investor. The investor can fall into the three categories:
Risk Averse
A Risk averse investor would like to avoid risk or take less risk. The investor would be willing to take very less risk and would be okay with low returns.
Risk Neutral
Risk neutral investors are the investors who would be willing to take somewhat risk and not very high risk. This type of investor would want moderate returns on the investments.
Risk Taking
These types of investors are willing to take high risk. They do not have problem taking high risk. But with the high risk they also want high returns.
The risk capacity of an individual is affected by many factors like the age of person, income earned, insurance coverage of an individual, marital status, family structure and many other factors.
Investment Constraints
Apart from the risk and return relationship, there are other factors which play an important role in investment planning. Some of these constraints are as follows:
Liquidity Needs
The time at which the investor wants his /her money is also crucial and thus leads to an important factor which is liquidity. It means how quickly the asset can be converted into cash. If an investor wants the money invested immediately and want to keep liquid then banks are considered as an option.
Usually a retired person would want to maintain a high liquidity and a youngster would want less liquidity as there are no immediate requirements.
Government Regulations and Legal Matters
The financial market is highly regulated in any country. In US, SEC regulates the entire financial market in order to protect the interest of the investors. This ensures that companies do not engage in any activity which would hurt investor sentiment and harm the investor interest. On the other hand it also ensures that the investors or the institutions do not indulge in any illegal practices like insider trading which would disrupt the market. These bodies ensure that fair play in the financial market on both the sides – investors and companies.
Time Period
We can divide the investors into following category based on the time period of investors:
Short Term
If money is required in very short term then this is termed at short term investments. The periods are usually very short. In this scenario we invest in the assets or securities which gives us high returns in short span of time like small cap stock. They are the investors who want to maintain high liquidity.
Medium Term
These investors want to invest neither for very long term nor for short term. Thus, they want can take up a combination of more and less risky assets.
Long Term
For these investors the money is invested foe a very long term usually in large cap funds. The risk of investments is reduced or minimized in ling term investments but the liquidity is not present.
Tax Concerns and Issues
Taxation plays an important role in our lives and the income and expenditure related decisions taken. The investments are also largely impacted by the taxation policies. Many investors want to save the tax and thus choose several investment options in order to save the tax. Government has several taxation rules regarding capital gains, long term gains and how investor can save money on them.
Portfolio Management
Investments are the money invested in various money market instruments or in any other form like real estate. The main objective of the investment is the use the excess capital for any individual and put to the effective usage, to ensure the safety of the capital and mainly to earn some returns on the excess capital. For these three purposes individuals invest in various instruments. Financial market instruments are largely...