Question

What is this investment theory? Do you agree with this theory or not? Why or why not?

Do you have any suggestions of products that you would consider to reduce risk while maximizing your return?

Answer 1

The Accelerator Theory of Investment: The accelerator theory of investment, in its simplest form, is based upon the nation that a particular amount of capital stock is necessary to produce a given output. ... If output increases, net investment is positive.

Under the internal funds theory of investment, the desired capital stock and, hence, investment depends on the level of profits. Several different explanations have been offered. Jan Tinbergen, for example, has argued that realized profits accurately reflect expected profits.

Since investment presumably depends on expected profits, investment is positively related to realized profits. Alternatively, it has been argued that managers have a decided preference for financing investment internally.

Firms may obtain funds for investment purposes from a variety of sources:

(1) Retained earnings,

(2) Depreciation expense (funds set aside as plant and equipment depreciate),

(3) Various types of borrowing, including sale of bonds,

(4) The sale of stock.

Retained earnings and depreciation expense are sources of funds internal to the firm; the other sources are external to the firm. Borrowing commits a firm to a series of fixed payments. Should a recession occur, the firm maybe unable to meet its commitments, forcing it to borrow or sell stock on unfavorable terms or even forcing it into bankruptcy.