You are working as a financial analyst at a brokerage firm and a colleague says to...
You are working as a financial analyst at a brokerage firm and a colleague says to you “the Potts Corporation had a return on equity (ROE) of 20% last year. We should recommend the stock to our clients.” How would you respond to your colleague?
Homework Answers
The statement by the colleague is not appropriate.
Recommending a stock simply based on one metric such as ROE is incorrect because the prospects of a stock cannot be estimated based on just one metric. Even if it is, the metric should be compared against the ROE of the firm in the past, and also compared to the industry-average ROE.
The recommendation of stocks to any client should also be done after due consideration to the client's risk-return objectives and their ability/tolerance to take risk.
Due to these reasons, the statement by the colleague is inappropriate and the stock should not be recommended on the basis of the colleague's statement.
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