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Chapter 4: Q2DQ (page 319)

Why might investors demand a lower rate of return for an investment in Microsoft as compared to United Airlines?

Short Answer

Expert verified

Investors are willing lower returns in the case of company M due to its lower financial rate and strong market position as compared to company UA.

Step by step solution

01

Risk and return

The rate of return is determined based on the level of risk in the investment. This risk generates the risk premium that is added to the real rate of return to get the risk-free return.

02

Lower return for investment

As stated above, risk and return are completely related to each other. The rate of return is completely dependent on the level of risk. If the level of risk is high then the return would also high and advice versa.

In the given case of company M and UA, the investors are willing lower the rate of return in the case of company M due to its lower financial risk and strong market position. In the case of company UA, the risk is comparatively higher than company M. So the rate of return would be demanded higher in the case of company UA.

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