Chapter 10, Problem 1CQ

Investment Selection Given that Madrigal Pharmaceuticals was up by about 516 percent for 2017, why didn’t all investors hold Madrigal?

Summary Introduction

To discuss: The reason for not holding stocks of Company M even after knowing that Company M was up by 516 percent in 2017.

Introduction: Investors can earn returns from any investment in stocks in two forms, i.e., by capital gains due to an increase in stock value in the market or by dividends distributed by the company at a specified time period.

Answer to Problem 1CQ

The reason could be high-risk involvement due to high volatility.

Explanation of Solution

Given Information: Company M was up by 516 percent in 2017 and Company S was also up by 438 percent of gains. But there were some companies whose share prices dropped.

Investors can invest in any stock depending on the company’s previous performance along with the potential of earning returns and the risk associated with the investment. When company M’s shares were up by 516 percent in 2017 many investors were happy but many people would have wished to invest in Company M at that time. But even after knowing that share was up in 2017 many investors do not hold shares of company M due to high-risk involvement. The increase of 516 percent shows that the volatility of the stock price is high. Investors holding shares of Company M may bear huge profits but it is also likely that investors of Company M may incur huge losses in the future.

Therefore, not all investors are ready to take high risks.