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Risk, return, and portfolios in the technology sector

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Suppose that you have a friend who likes to invest in technology stocks. "Sure, they are risky," he says, "but the technology sector can go up over 50% in a year. You will never achieve that kind of return with a diversified portfolio." How would you respond to such a comment?

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The solution responds to a comment regarding risk, return, and portfolios in general.

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RISK, RETURN, AND PORTFOLIO INVESTMENT

Suppose that you have a friend who likes to invest in technology stocks. "Sure, they are risky," he says, "but the technology sector can go up over 50% in a year. You will never achieve that kind of return with a diversified portfolio."

A Reaction

The case at hand is an example of a single investment in technology which is acceptably a risky investment but with a promise of high return that may reach as high as 50% in a year.
Risky investments are generally characterized as: they are more sensitive to business downturns because the nature of the business is such that the markets may quickly appear then disappear (Keown, 2002). Because of high degree of risk or uncertainty, more variability in profits and cash flows are expected.
In ...

Solution provided by:
Elisa Valdez, PhD
Education
  • Bachelor of Science in Business Administration, University of the Philippines
  • Master in Business Administration, Saint Mary's University
  • Doctor of Philosophy in Education, University of the Philippines
  • Doctor in Business Adminstration (IP), Polytechnic University of the Philippines
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