Question

Discuss the basic relationship between risk and return. How would you determine if stock investment is an appropriate alternative for your company?

Answer 1

The basic relationship between risk and return is that, as return expectations increase, the risk of the stock also increases. Alternatively, if there is a stock of a risky company, then investors would require a higher return to invest in that company to be compensated for taking higher risk. This is commpany known as the risk-return trade-off also

To determine if stock is an appropriate alternative for the company as compared to debt, we can see what is the average return investors are anticipating for similar companies in the industry or consider the industry average return. Then we can look at the return of the benchmark index and the diffrence of the two will give us the excess return that an invstor would expect to get if they invest in our company. Moreover, if the company cannot generate such returns, then they its better to go for alternate investments such as debt.

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