decision making Many firms evaluate investment projects individually on the basis of expected value and at...
decision making
Many firms evaluate investment projects individually on the basis of expected value and at the same time maintain diversified holdings in order to reduce risk. Does this make sense in light of the discussion of risk attitudes?
Homework Answers
The risk attitudes of the Firms may vary. Some may be aggressive investors, some calculative while some other may be neutral. The Risk attitude could be to seek for more risk, to avoid the same or to remain neutral thus. Risk attitude is further dependent upon the amount of investment proportionating to the Total assets of such Firms. If the amount is small, the risk appetite could be more and if the amount is substantial, then vice-versa.
Certain Firms may take calculative risk approach be evaluating the expected value of the returns on investments in the Projects and at the same time ensure that diversification makes it feasible for such Firms to spread the risk over a large part of their investments. This shows that such Firms generally are Risk-averse Firms. They are as sensitive to the changes that could be incidental to such risk attitudes and therefore their decision-making shall be such that diversification plays an important part to lessen the risks or to spread it upon more investment variables.
So this does make sense in the light of the discussion of risk attitudes.
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