Traditional economics focuses on transactions where only one item—money—is exchanged. Financial economics, in contrast, focuses on transactions where funds of one kind or another is likely to be present on both sides of a deal.
The main advantage of financial economies is that it gives investors the knowledge they need to judge wise judgments about their investment possibilities. The fair market value of the item they want to buy, the rules in the financial markets where they operate, and the hazards and risk factors connected to their investments are all laid out for them.
Almost all financial activity includes risk. Anyone who continues to follow the stock market will observe that the trends of the equities being traded are subject to alter at any time. Investing in stocks can have high profits, but an increased risk is involved. In a perfect world, if an investor held two risky assets, their performances would compensate for the other.
This idea, also known as the Modern Portfolio Theory, contends that investors have a built-in aversion to risk and would therefore attempt to steer clear of assets with higher risks and lower returns. However, more extensive return investments unquestionably carry greater risk.
The idea contends that assets should be managed based on how they interact with one another rather than how well they function independently. This is because by selecting the ideal mix of these assets, an investor can get the best return at a given amount of risk and vice versa.
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