the risk/return trade-off. The management should try to maximize the average profit while minimizing the risk. Risk-Return Trade-Off The concept that every rational investor , at a given level of risk , will accept only the largest expected return . working capital management is to attain optimum trade off between liquidity and profitability. Risk-Return Trade Off: The prime objective of Financial Management is maximize the value of the firm, which is possible only when well balanced financial decisions are taken. The level, at which there is a trade-off between the risk and return, is the optimum level of working capital for a firm. Learning Objective 2. Thus a firm has reach a balance (trade-off) between the financial risk and risk of non-employment of debt capital to increase its market value. Advantage of Maintaining Working Capital at Optimal Level . Description: For example, Rohan faces a risk return trade off while making his decision to invest. On the other hand, if it is very conservative it will have a surplus of working capital, which will adversely affect profits. 19) Within the context of working capital management, the risk-return trade-off involves an increased risk of illiquidity versus increased profitability. Paper F9: Financial management ... C Working capital management 1 The nature, elements and importance of working capital a) Describe the nature of working capital and identify its elements. a. a trade-off between liquidity and activity b. a trade-off between debt and equity 1) The hedging principle is also called the principle of self-liquidating inventory. This trade off which an investor faces between risk and return while considering investment decisions is called the risk return trade off. We selected a sample of 92 Pakistani firms from textile sector for the period 2001 to 2008. Because if we consider risk and return theory, more risky investment will provide more return. Each of these involve a risk return trade off. This study investigates the hypothesis that working capital management has effect on profitability and there exist a trade-off between risk and return. The trade-off between profitability and risk is the key to working capital management. 36) Discuss the risk-return tradeoff experienced in working-capital management. Management of working capital involves risk-return trade-off. If the firm’s level of current assets is … There should be a balance between profitability and risk. If he deposits all his money in a saving bank account, he will earn a low return i.e. 3) The hedging principle involves the use of … When the firm does so its rate of return will decline as more funds are tied up in idle cash. The risk-return trade-off in managing a firm's working capital involves which of the following? The projects promising a high average profit are generally accompanied by high risk. Working capital management involves management of the firms liquidity which involves management of current assets and current liabilities. If the level of current assets of the firm is very high, it has excess liquidity. That is, given two investments at the exact same level of risk, all other things being equal, every rational investor will invest in the one that offers the higher return. Answer: TRUE 20) A company with a current ratio less than one or negative net working capital would not be able to pay its bills on time. 2) Accrued taxes and salaries payable are both sources of spontaneous financing. Some of the major advantages of keeping working capital at optimal level are as under: Too little working capital increases profit but reduces liquidity, as … Theory, more risky investment will provide more return between liquidity and profitability a risk trade. 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