What Are The Advantages And Disadvantages Of The Financial Services Industry

Investment has become a growing tendency and method for people to deal with their income, while portfolio is an important investment vehicle. In the same time, financial services industry has played a critical part in making investment portfolio available to ordinary people. In this essay, the meaning and functions of portfolio will be analyzed and it will argue the advantages of the financial services industry outweigh the disadvantages.

Firstly, portfolio theory has become an essential strategy in the modern investment market. In general, according to Elton (2011), it is a common situation that each person may possess a portfolio which is combined with real assets such as a vehicle or a house, including financial assets such as stocks

After listing every and of each individual asset in the same coordinate, with as Y-axis and as X-axis, the optimal portfolios are on the line describing the outline all of the dots, which is the blue one in the Figure 1. If every investor can follow the assumptions above, then every point on the blue line represents an efficient portfolio that maximizes the return for any given level of risk. And the blue line is the very efficient frontier combined with a series of optimal portfolios, which should be the choice range for investors to make decisions.

But when it comes to the individual investor, there is still one more piece of information needed to select the suitable portfolio, which is called utility of return. Although, according to the assumptions above, every investor is risk-averse and pursuit for maximum return, not all of them do share the same acceptance of the same risk. That means, different investor has different preferences for risk in order to receive the similar return, which causes various utilities. The divergent gradients among c1, c2 and c3 in Figure 2 reflect the diverse utility of return. As shown in the graph, for the sake of the same level of return, investor c1 could bear the most risk, while c3 could accept the least risk. It is the intersection of efficient portfolio and utility of return that is the exact optimal

Without professional knowledge and full information about the market, ordinary people still can build their own portfolio with the help of the financial services industry, which is assigned particularly for people’s intangible assets. Ennew and Waite (2013) stated that financial services broadly includes banking services, insurance (both life and general), stock trading, asset management, credit cards, foreign exchange, trade finance, venture capital and others. And the function of these various services is to feed a number of different demands. They normally desire a formal relationship between provider and consumer, also, a degree of customization was typically required, which is pretty restricted as for a basic bank account but quite extensive as for venture