Friday, 14 March 2014

Less risk more return

Is lower risk higher return possible? I would argue it's possible and i'll explain.


·         Let’s suppose a share is currently trading at $20. Now that share price after some time e.g. 3 months falls to $10. The next day, a Russian bank, who’s a substantial holder of the company in question goes bankrupt and has to sell all its shares, pushing the price down to $5. This means that you can only now lose half as much. Moreover, it means that if the stock bounces back to $20, you can also gain twice as much. Thus, if the stock price gyrates for reasons unrelated to a company’s fundamentals, I would argue that this is an example of less risk and high return.



No comments:

Post a Comment