2 Financial Assets and Investment Risk
Lodewijk van Setten
- Debt — Derivatives — Equity — Financial stability — Collective investment scheme — Securitization vehicles
This chapter focuses on the economic concept of financial assets and the notion of investment risk. After explaining what a financial asset is, it considers the various categories of financial assets and their risk and return properties. Primary financial assets, namely, equity and debt interests, are discussed, along with secondary financial assets such as collective investment and securitisation schemes. The chapter goes on to examine meta financial assets, such as derivatives; several financing techniques used by participants in the financial markets; investment risk and how it is measured; and the effect of covariance on the investment risk of a portfolio of financial assets, taking into account investment risk reduction through diversification and the practice of short selling. Finally, it analyses the use of the ‘Capital Asset Pricing Model’ (CAPM) to optimise risk and return relationships.