the theory of risk & return

  1. 1,816 Posts.
    It is fundamentally flawed...

    Let's take a company named XYZ.

    In 1999 XYZ shares were trading at $5.00. Free cash flows per share were 30c.

    Now four years later in 2003 XYZ shares are trading at $3.00, and they're still generate 30c per share in free cash flow. All other fundamental factors are also the same.

    What was the level of risk buying XYZ share for the long term in 1999...? Was it greater than it is today...?

    Answer: NO !

    What about potential future returns..? Do you think XYZ shares offered greater future returns in 1999 than they do today..?

    Answer: NO !

    So in summary, what i've proven in my example is something that applies all around us.

    Higher risk leads to higher returns in some markets, but NOT in all markets.

    From this day forth, this piece of inspiration will be named "NICKOO's amendment" to risk & return.

    Penned 28/2/03. Copyright. 03.
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