The investor's objectives are his or her investment goals expressed in terms of both risk and returns. The relationship between risk and returns requires that goals not be expressed only interms of returns. Expressing goals only in terms of returns can lead to:
Click on the arrows to vote for the correct answer
A. B. C. D.AB
The relationship between risk and returns is an essential concept in investing. Investors must set their investment objectives by considering both risk and returns. Investment objectives can be expressed as specific goals or targets for a portfolio's performance, such as achieving a certain level of return while minimizing risk.
Expressing investment goals only in terms of returns can lead to several problems. Firstly, it can result in churning, which is excessive buying and selling of securities in a portfolio to generate commissions for the portfolio manager. If the investor's goals are solely focused on returns, the portfolio manager may engage in churning to achieve those returns, which can result in significant transaction costs for the investor, without necessarily improving portfolio performance.
Secondly, expressing goals only in terms of returns can lead to inappropriate investment practices by the portfolio manager. A portfolio manager may be tempted to take on excessive risk or invest in speculative securities to achieve higher returns. Such investment strategies may not align with the investor's risk tolerance or long-term financial objectives, potentially putting the investor's financial goals at risk.
Thirdly, expressing goals solely in terms of returns can result in a lack of focus on risk management and hedging. It is essential to manage investment risks to avoid potential losses that can undermine the investor's long-term financial goals. Without considering the risks involved in pursuing a certain level of return, investors may overlook the need for diversification or other risk management strategies.
Finally, expressing goals solely in terms of returns is unrelated to over-the-counter (OTC) trading. OTC trading refers to the buying and selling of securities that do not trade on a public exchange, such as stocks traded on the NASDAQ or NYSE. The decision to engage in OTC trading is based on many factors, including the specific characteristics of the securities, liquidity, and transaction costs, among others.
In conclusion, expressing investment goals only in terms of returns can lead to several problems, including churning, inappropriate investment practices by the portfolio manager, and a lack of focus on risk management and hedging. Therefore, it is essential for investors to consider both risk and returns when setting their investment objectives.