MODELING THE IMPACT OF INVESTMENT RETURNS AND RISKS IN THE CONTEXT OF PERSONAL FINANCE MANAGEMENT

Abstract

Personal finance management is a key aspect of achieving financial stability and well-being and plays an important role in the life of a modern person. Investments are one of the tools of personal finance management that allows you to save and accumulate funds. An important factor in choosing investment financial instruments is finding a balanced ratio of return and risk. Return defines the expected future profit from investments, while risk characterizes the degree of uncertainty and the probability that actual returns will differ from the expected ones. This paper considers approaches to selecting an investment portfolio and improving its return and risk through the diversification of risky assets. Adding risk-free assets to the portfolio significantly expands the range of available efficient portfolios. The paper also analyzes the impact of investment portfolio return and risk on the achievement of personal financial goals using Monte Carlo simulation. This method is based on the use of random numbers to simulate real processes. Input parameters for calculations, such as income for the current period and inflation rates, are characterized by probabilistic features. As a result of performing a large number of simulations, the probability of achieving a financial goal and the average value of the outcome given the input parameters are obtained. The example demonstrates how an increase in returns affects accumulation, and consequently enhances the average potential profit. Higher risk, in turn, can reduce the probability of achieving the financial goal in general. The paper shows the need for a balanced choice of return and risk of investments. This decision is based on trade-off, and the optimal outcomes can differ and depend on the specific objectives established. A balanced approach to the choice of return and risk, as well as modeling their impact on the final result, makes it possible to optimize financial decisions for a wide range of personal finance tasks.