Videos [3:44 + 4:21 min]: Risk/Return Tradeoff and Risks/Rewards of Leverage

Synopsis: Financial managers must balance risk against reward as they consider whether an opportunity for profit is worth risking the potential for loss.

As the Corning situation described in Section 16.1 demonstrates, financial managers are required to assess an opportunity for profit compared to the potential for loss.

In finance, another way to call profit is return. Likewise, risk is another way think about the potential for either a complete loss, or a return on investment that is less than an expected level of return.

As you will note in the video, a basic principle in finance is called the risk-return trade-off. This term essentially means that the higher the risk, the greater the return that is required to offset the risk. But, as the video explains, just because there is a greater risk, there is no guarantee of a greater reward.

After watching the video, which provided a real-life illustration from the 2008 financial crisis, what might you think would be some similar examples that could be made from the negative economic consequences of the global COVID-19 pandemic?