It is always a wise decision to invest in either gold or land or stocks, shares, bonds debenture etc. The sole aim of this investment is to earn profit and utilize it for future purpose. But, we must understand one thing before investing. That important thing is the return we get back. The return is basically high when compared to the investment in terms of the value in most of the cases. but, when we consider the Net present value, the returns might not be greater than investment. So, we must be very careful in that decision.
Net present value is nothing but the amount we receive in future divided by the interest rate. Suppose we are investing 10,000 in a bank and get back 15,000 in the next year, it has more value than getting 3,200 for the next 5 years. Since, the value of 3200 gets reduces each year and would not sum up to the the value of 15000, we get next year. There are certain constraints which are usually involved in determining this investment decision. They are mainly price, quantity,tax, exchange rate and so on. We must have a clear idea of the risk involved before taking the decisions. There may be a minimal risk, higher risk or medium risk.
If we consider two stocks having same variance, then the stock with maximum return will be selected. Suppose, if there are two stocks or bonds with same return, then the stock with the least amount of variance will be selected, since the risk involved will be lesser in that case. Mostly, the stock with the highest net present value and the least variance would be selected. Suppose if there are 3 different types of stocks one with lower return and low variance, medium return and medium variance, high return and high variance, then the decision might depend on the investor, It mainly depends on their utility.
In certain cases there is a co-relation between two decisions we make. If there is an average return of Ice cream shop is $100 and there is a deviation of $10, the risk involved is low. If we again invest on another shop, where there is a deviation of $20 and the average return of $100, if one goes on well, there will be a direct implication on other and it will do well and vice versa. This shows a positive co-relation. Suppose if a hot drink shop is introduced and involved after the first icecream shop, there is a negative co-relation with icecream shop. The ice creams would be preferred in summer where hot drink won't do good business and vice versa.
If the relationship is inverse either one of the business would do good. The risk involved in positive co-relation is high which just enhances the total risk involved, whereas in the other case, the negative co-relation is low which reduces the total risk but the returns may not be as high. Here comes the confusion of choosing between the two. It is again based on the investor's perspective. Low risk involved means returns will be less and vice versa. In rare cases, returns will be high with less risks.
Net present value is nothing but the amount we receive in future divided by the interest rate. Suppose we are investing 10,000 in a bank and get back 15,000 in the next year, it has more value than getting 3,200 for the next 5 years. Since, the value of 3200 gets reduces each year and would not sum up to the the value of 15000, we get next year. There are certain constraints which are usually involved in determining this investment decision. They are mainly price, quantity,tax, exchange rate and so on. We must have a clear idea of the risk involved before taking the decisions. There may be a minimal risk, higher risk or medium risk.
If we consider two stocks having same variance, then the stock with maximum return will be selected. Suppose, if there are two stocks or bonds with same return, then the stock with the least amount of variance will be selected, since the risk involved will be lesser in that case. Mostly, the stock with the highest net present value and the least variance would be selected. Suppose if there are 3 different types of stocks one with lower return and low variance, medium return and medium variance, high return and high variance, then the decision might depend on the investor, It mainly depends on their utility.
In certain cases there is a co-relation between two decisions we make. If there is an average return of Ice cream shop is $100 and there is a deviation of $10, the risk involved is low. If we again invest on another shop, where there is a deviation of $20 and the average return of $100, if one goes on well, there will be a direct implication on other and it will do well and vice versa. This shows a positive co-relation. Suppose if a hot drink shop is introduced and involved after the first icecream shop, there is a negative co-relation with icecream shop. The ice creams would be preferred in summer where hot drink won't do good business and vice versa.
If the relationship is inverse either one of the business would do good. The risk involved in positive co-relation is high which just enhances the total risk involved, whereas in the other case, the negative co-relation is low which reduces the total risk but the returns may not be as high. Here comes the confusion of choosing between the two. It is again based on the investor's perspective. Low risk involved means returns will be less and vice versa. In rare cases, returns will be high with less risks.
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