--%>

Investors are irrational or naive

Explain how companies with substandard financial history can draw the attention of investors. Are investors irrational or naive?

E

Expert

Verified

There may be some companies in the world whose performance in the past may not be good due to poor management, poor market condition, increased competition, introduction of substitutes in the market. All these can lead to decrease in revenue and ultimately profits. Now there may be companies whose financial performance has decreased not due to some mismanagement but due to some hard hitting abnormal conditions such as poor market etc.

Investors look out for distressed investments so that they can purchase the stake at low valuations. Investors know which company has good prospects and they can exit such investments at a high valuation at a later stage. They are very smart individuals.

Investors are neither irrational nor naive. They took any investment decisions based on many factors such as future growth of the sector, the competition in the market, how to maximize returns etc. They take decisions after they know that they will get their required Rate of return from the investment. Further, investors are also not naive. It is their hard earned money. They make investments only after they are reasonably sure of a good and profitable exit. They apply various techniques of valuation to evaluate a company before investing in it. They do not invest in a company just by their whim They also have mandate which they have to fulfill.

   Related Questions in Corporate Finance

  • Q : Finance A middle income worker, with a

    A middle income worker, with a dependent spouse older than the normal retirement age, retired in January 2004. In the year prior to retirement, her gross monthly earnings were $1,500. Her Social Security pension benefit is $1,000 per month. Prior to retirement, she was subject to total taxes on her

  • Q : What is real gross domestic product

    Real gross domestic product: If GDP of a particular year is estimated or evaluated on the basis of the base year prices it is termed as real gross domestic product.

  • Q : How much confidence can an investor

    I heard conversation of the Earnings Yield Gap ratio, that is the difference among the inverse of the PER and the TIR on 10-year-bonds. This is said that if this ratio is positive then this is more advantageous to invest in equity. How much confidence can an investor

  • Q : Financial problem regarding acquistion

    My Company paid an extremely higher price for the acquisition of other company; the price was recommended through the valuation of an investment bank. Now we have financial problems. So is there any way to make this bank legally responsible for such situation?

  • Q : Determine the future value What would

    What would the future value after 5 years of $100 be at 10% compound interest?

  • Q : Explain lognormal random walk based on

    Explain lognormal random walk based on Brownian motion.

  • Q : Expected return and standard deviation

    If an investor is considered to be risk-averse, what is his/her attitude towards expected return and standard deviation?

  • Q : Who introduced put–call parity Who

    Who introduced put–call parity?

  • Q : Explain the model of Heath Explain the

    Explain the model of Heath, Jarrow and Morton regarding tree building or Monte Carlo simulation.

  • Q : Long-Term Financing Needed Long-Term

    Long-Term Financing Needed : - At year-end 2012, total assets for Ambrose Inc. were $1.2 million and accounts payable were $375,000. Sales, which in 2012 were $2.5 million, are expected to increase by 25% in 2013. Total ass