14. Risk and return - Implications for managers and investors

The concept of risk and return is subjective for different people, as well as for corporations.

Read and assess the following financial decisions. Keeping everything else constant, are the following actions good financial decisions? Base your decisions on the understanding of risk and return, solely from a theoretical finance perspective.

Joe is an average investor. His financial advisor gave him options of investing in stock A, with a of 12%, and stock B, with a of 9%. Both stocks have the same expected return of 16%. Joe can pick only one stock and decides to invest in stock B.

	Good Financial Decision?
	Yes	No

Marcie works for an educational technology firm that recently launched its employee stock option plan (ESOP). Marcie allocated all her investments in the ESOP.

	Good Financial Decision?
	Yes	No

Erin wants to invest in a hedge fund that has had a very strong performance track record. The hedge fund has given its investors a return of over 60% for the past five years. Although Erin is tempted to put her money in the fund, she decides to conduct due diligence on the hedge funds assets, because she is aware that past performance is no guarantee of future results.

	Good Financial Decision?
	Yes	No