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Let us return to our starting point: individuals like to get a high return on their investment, but dislike an excess of risk – that is to say they prefer as little variation in their return as possible, other things equal.
Evidently, a firm is a risky operation, and consequently investing in a firm bears risks. Risk management of the type we have just explored is critical to inducing risk-averse individuals to invest in corporations whose returns are uncertain. Let us see how.
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