Question

When considering the two investments rules how do they effect the investment choice when considering a pair of potential investments? Would you consider a higher risk in your investment choice or a lower risk to be safe?

Answer 1

The investments will be classfied into different categories based on :

a) By project size

Small projects may be approved by departmental managers. More careful analysis and Board of Directors' approval is needed for large projects of, say, half a million dollars or more.

b) By type of benefit to the firm

· an increase in cash flow

· a decrease in risk

· an indirect benefit (showers for workers, etc).

c) By degree of dependence

· mutually exclusive projects (can execute project A or B, but not both)

· complementary projects: taking project A increases the cash flow of project B.

· substitute projects: taking project A decreases the cash flow of project B.

d) By degree of statistical dependence

· Positive dependence

· Negative dependence

· Statistical independence.

e) By type of cash flow

· Conventional cash flow: only one change in the cash flow sign

e.g. -/++++ or +/----, etc

· Non-conventional cash flows: more than one change in the cash flow sign,

e.g. +/-/+++ or -/+/-/++++, etc.

In consideration of 2 investments there will be one or the other low key point for one investment to other and the advantage will be identified and used in decision making .

In choosing the risk factor we have to first identify the type of investor we are

1 conservative

2 moderately conservative

3 aggressive

4 very aggressive

The 1 and 2 goes with short term and low risk and low profits .

Eg : short term bonds , govt securities .

3 and 4 goes with ling lerm and high risky and high profits.

There is always a choice and you have to decide where you are going to be in the future market and with all necessary peedictions .

I personally go with short term low risk and add up my value.