15. Risk and return - Implications for managers and investors

The concept of risk and return is subjective for different people, as well as for corporations.

Read and assess the following financial decisions. Keeping everything else constant, are the following actions good financial decisions? Base your decisions on the understanding of risk and return, solely from a theoretical finance perspective.

Juan is a small-business owner. He has some cash flow and wants to invest in a new project. Juans assistant provides an evaluation and estimates the nominal returns that Juan would earn if he invests in the project. Juan reads the evaluation and makes the decision based on the real terms after factoring in inflation.

	Good Financial Decision?
	Yes	No

Marcie works for an educational technology firm that recently launched its employee stock option plan (ESOP). Marcie allocated all her investments in the ESOP.

	Good Financial Decision?
	Yes	No

Erin wants to invest in a hedge fund that has had a very strong performance track record. The hedge fund has given its investors a return of over 60% for the past five years. Although Erin is tempted to put her money in the fund, she decides to conduct due diligence on the hedge funds assets, because she is aware that past performance is no guarantee of future results.

	Good Financial Decision?
	Yes	No