Question

One of the key assumptions in finance is that people are risk averse. What do we mean by risk aversion? Does this seem to be a valid assumption? Explain.

How does globalization relate to the concept of maximizing firm value?

Answer 1

A. One of the assumptions in finance is that people is risk averse and they are not preferring risk in order to make high rate of return and they will be always wanting to eliminate risk.

Risk aversion is the tendency of an investor to avoid the risk investment and minimise his overall risk associated with investment.

This does not seem to be a valid assumption because not every investor is risk averse as investors are also taking higher risk in order to make higher returns so there is always a balance between risk loving investor and risk averse investor as there are many investors who are loving high rate of risk in order to make high rate of return which can easily be identified in various stock markets.

B. Globalisation will be relating to the concept of maximization of the firm value because globalisation will be increasing the overall prospect of the company as when the company will be going global it will have a chance of maximizing upon its market share and it will also have a chance of increasing its investors base and it will also have probability of merger and acquisition along with cutting of cost by reduction of risk through proper diversification in the global space and hence it can be said that globalisation can lead to maximization of fim value through various prospects like diversification and cost cutting along with maximization of market share.