Question: 6 . Risk and return - Implications for managers and investors The concept of risk and return is subjective for different people, as well as

6 .

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

\

sigma of

12 %,

and stock B

,

with a

\

sigma 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

The technology boom in the late

1990

s enticed everyone. Wilson is an average investor, and he invested all his money in technology stocks.

Good Financial Decision?

Yes

.

and Mrs

.

Smith are in the middle of their investment planning, so they hire a financial planner. In their discussions with the financial planner, they include their investment timeline and the length of time that they can keep investing. This helps Mr

.

and Mrs

.

Smith come up with an investment objective and a financial plan.

Good Financial Decision?

Yes

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