Question

Risk is a major concern of almost all investors. When shareholders invest their money in a firm, they expect managers to take risk with those funds. What do you think are the ethical limits that managers should observe when taking risk with other people's money?

Answer 1

Risk is variability in actual return from the expected return. In the real world, the risk is caused by uncertainty. There is some risk that can be eliminated through diversification and some are those which can not be eliminated. A manager should reveal all the material information about the amount of risk and expected quantum of loss before asking the investors to invest. Also, the manager should not be taking up more risk than what is approved by the investors. They should always try to maximize the return by taking the approved amount of risk. The manager should be held responsible for the losses if it is found that he has taken more than approved amount of risk.

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