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.

Scenario	Good Financial Decision	Bad Financial Decision
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.
The technology boom in the late 1990s enticed everyone. Wilson is an average investor, and he invested all his money in technology stocks.
Erin wants to invest in a hedge fund that has 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.

Successful financial management requires knowledge of not only the terminology, mathematics, and techniques of financial management, but also that of human psychology and sociology. Financial and economic history in generaland market bubbles in particularare filled with examples of both rational and irrational behaviors. Which of the following behaviors are true characterizations of a market bubble and which are false?

Behavior	True	False
Extremely high trading volumes vis-a-vis historical averages
Early in the development of a market bubble, asset prices are affected more by the trading behaviors of long-term, experienced and knowledgeable market participants rather than from the activities of inexperienced and naive buyers and sellers.
Sudden, unexpected, and significant price declines

The field of behavioral finance tends to identify and explain irrational-but-predictable financial decision-making behaviors. Among the irrational behaviors that have been identified thus far are overconfidence, anchoring bias, hindsight bias, self-attribution bias, and herding behavior.

Read each of the definitions below and identify the behavior it describes:

Definition	Behavior
After an event has occurred, people tend to believe that they predicted the event.
People prefer a smaller, but certain, gain to a larger, but risky gain; as well as a larger, but risky, loss to a smaller, but sure, loss.
People tend to ascribe success to their own talent and skill, while failure is the result of bad luck or someone else.