Question

If you had a half million dollars to invest, would you prefer to invest in a company that has made steadily increasing profits year after year? Or would you prefer instead to invest in a company that has experienced dramatic ups and downs in profitability, some years with huge profits and other years with huge losses? Explain the reasons for your preference.

Answer 1

Investment is totally dependent on risk apatite of an investor.

As this case is choosing either of opportunity not both, then:

Given a choice to invest half a million dollars, I would invest money in the firm which is showing a steady increase in profits for years. The “flight to quality” or blue-chip firms is pretty safe to invest. Firm which is steady in making profits would be in safest business model. Generally, medium level risk is preferred when we choose equities.

Whereas the firm showing a dramatic ups and downs can eat up the value of investment hence, it can turn to be worst choice within a year. It is totally playing up with luck if we chose to invest in such firm.