Question

Financial decisions or investments are made with the assessment of risk trade-off. How would that risk change if the firm were large? Small? Medium sized? Why or why not? Provide an example in your response and some specificity to your ideas.

Answer 1

Higher risk is associated with greater probability of higher return and lower risk with a greater probability of smaller return. However Risk is inherent in every investment but its value varies with the form of instrument

Risk change in Large Companies:

Large cap companies tend to be less riskier than small cap companies. they have large resources which provide an edge from negative events. Large cap companies typically use safer investment, especially during a downturn in the business cycle, as they are much more likely to weather changes without significant harm. Intra-group variability in ROA was lowest for the largest firms.

Risk change in Small Companies:

Small cap companies tend to take riskier than large cap companies. They have more growth potential, and make to offer better returns, especially over the long term. But they do not have the resources of large cap companies, making them more vulnerable to negative events and bearish sentiments.

Risk change in Medium Companies:

Medium cap companies have the potential to grow significantly. However, they often face higher financing costs and are more likely than their larger counterparts to fail. Compared with larger firms medium-sized enterprises tend to take on more risk and to face more uncertainty. Firms in the medium size class, which have the highest ROA, tended to have relatively low variability in their rates of return.

NOTE: Ideas have been described in the solution but examples have been skipped.