Question

What is true about the profitability trade off? A) The lower the risk, the higher the...

What is true about the profitability trade off?

A) The lower the risk, the higher the return.
B) The higher the risk, the lower the return.
C) The higher the risk, the higher the return.

D) None of the above.
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Answer #1

Answer: C

There are so many ways of measuring profitability, like gross profit margin (= Gross profit / Net revenues), net profit margin (= Net profit / Net revenues), etc. Higher profitability is always desired, which depends on risk factors.

Some projects may have higher risk; some others may have lower risk. Only higher profitability can attract investing in riskier projects; this is the motivation and interest of investing in such. Therefore, return would be high for projects having higher risk.

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