Question

plz explain with an example

Explain why it is important for the firm to plan for the long term - and why some firms may be more incentivized to do this than others. Discuss the connection between risk and returns in finance. .

Answer 1

Answer(1): It is important for firm as well as for individuals to plan for long term, we can understand this point by following aspects-

Setting long term goals- If companies set long term goals, it will force and motivate you to organize your plans for achieving long term goals for success of business. There will be many ups and down throughout the life of business but if long term planning is done, it will be easy to achieve the target and become profitable.

Anticipation and estimation- If firms plan for long term and set objectives for long term, it will help them to anticipate any problem and they will be ready to face and fight with that problem. Firms make budget because they plan for future and compare estimated cost with actual cost to know the variance.

Minimizing risk- If firms who are directly exposed to risk, they plan for long term and make strategies to minimize the risk, the risk is surely minimized and profit gets increased.

Answer(2): Risk- It is the uncertainty that can occur in future.

Return- It is the profit that an investor expects from a financial source. It can be a loss also.

Risk and Return- These are the two side of each coin, risk comes with return and return comes with risk. If there is no risk, there is no or very minimum return. Risk is the probability that the actual return will be different from expected return.

Direct relationship: High risk high return

As far as investment is concerned, if there is high risk, there will be higher return. You will get a higher return if you invest into a high risk security or asset.

Diversification- It is a strategy of minimizing risk by not putting all your eggs in one basket rather invest your money into different assets so that you will get a balanced and high return and risk will be minimized.