Financial Economics considers and analyses various aspects of financial markets like the state of the economy (recession, stagflation, depression, etc.), inflation levels, stock markets, forex reserves, and more. It acts as an important study that enables sound investment decisions, valuation of securities and evaluating the risk of investments.
The key aspects of financial economics are risk management and diversification as well as understanding the present value of savings and investments affected due to inflation and risk of investments. Determining the expected rate of return on an investment using the Capitalist Asset Pricing Model (CAPM) is also part of financial economics. The study of financial economics helps in understanding the impact of prevailing laws and regulations on their individual portfolios thereby enables the investors on making informed decisions and effective risk management.