THE TRADE-OFF BETWEEN RISK AND RETURN

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THE TRADE-OFF BETWEEN RISK AND RETURN One of the Ten Principles of Economics in Chapter 1 is that people face trade-offs, The trade-off that is most relevant for understanding financial decisions is the trade-off between risk and return As we have seen, there are risks inherent in holding stocks, even in a diversified portfolio. But risk averse people […]

DIVERSIFICATION OF FIRM-SPECIFIC RISK

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DIVERSIFICATION OF FIRM-SPECIFIC RISK In 2002, Enron, a large and once widely respected company, went bankrupt amid accusations of fraud and accounting irregularities. Several of the company’s top executives were prosecuted and ended up going to prison. The saddest part of the story, however, involved thousands of lower-level employees. Not only did they lose their jobs, but many […]