As a financial advisor, are there factors other than return and risk that should be considered in making this decision?
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When making a decision regarding the company’s further investment in a specific stock, one needs to be especially careful as the company’s further success hinges on the choice made by the organization’s leader. Although the consideration of the return and the existing risks is crucial to the process of making the right choice between the existing investment options, it is also necessary to address the issues such as the firm’s return on investment (ROI), the annual income, and the gross margin. Additionally, the liquidity of the company’s stocks and shares will have to be analyzed carefully so that the existing financial risks should be identified. While the ROE rates along with the standard deviation of stocks serve as rather graphic evidence regarding the company’s potential, additional calculations will have to be carried out so that the purchase of the firm’s shares should not trigger drastic event in the organization acquiring the shares (Graham & Smart, 2011).
Based on these factors, what stock would you recommend to the client?
Although the information provided does not allow for an all-embracive analysis of the organization’s assets and the possible outcomes of acquiring its stocks and shares, the fact that the first option has a slightly higher return rate speaks in its favor. Although the difference of 1% may seem insignificant, it shows that Company A has more potential at present and, therefore, is worth investing in.
However, the fact that the first organization has a significantly higher standard deviation rates than the second one as far as the stock price is concerned shows quite clearly that the first organization is less trustworthy. Herein the significance of a third indicator of the organizations’ performances lies; until the one is introduced, the data provided will remain rather contradictory, and the chances of making a mistake are going to be rather high.
What reasons will you convey to your client to justify your decision to recommend this stock?
As it has been stressed above, the fact that the first organization has a higher stock price signifies that it is going to be rather profitable; therefore, the chances of gaining impressive returns are going to be comparatively high. One might argue that a difference in ROE making 1% is not going to matter much in the choice of a target for further investments. Indeed, given the fact that the global economic environment is very competitive, the opportunities for the second company to boost its ROE rates are rather high.
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Additionally, the second set of data shows rather graphically that the first organization has a very high standard deviation rate. Therefore, the variance of the company’s stock prices is very high as well. Hence, it can be assumed that the firm in question may lack stability in the environment of the global economy. In other words, when it comes to choosing an option for investment, locating the organization with higher stability rates seems a reasonable decision to make (Setianto, 2015).
How will this recommendation impact the client?
The recommendation provided above will spare the client a lot of problems concerning economic risks related to buying stocks and shares. Particularly, the customer is not going to be concerned with the possibility of the company collapsing under the pressure of the global economy. One might argue that the acquisition of the shares of the first company may also have its risks; however, the second option clearly has more to offer in terms of predictable outcomes. The client, therefore, can rest assured that the target of their investments is not going to make them incur losses.
Graham, J., & Smart, S. (2011). Introduction to corporate finance: What companies do. Boston, Massachusetts: Cengage Learning.
Setianto, B. (2015). Profile of the 45 Most actively traded stocks 2011-2014 in Indonesia stock market: Using formula of Warren Buffet and Benjamin Graham. Jakarta: BSK Capital.