Contradiction "risk-income" and ways to solve it in the process of making investment decisions

Abstract

The article analyzes the existing approaches to making optimal investment decisions from the point of view of solving the "risk-income" contradiction. Both such characteristics of the investment project as its efficiency (income) and risk are equally important for making investment decisions, they should be considered simultaneously and influence the decision made by the investor. The most well-known theories and approaches to solving the «risk-income" contradiction based on probabilistic characteristics and considering the investor's attitude to risk are analyzed. Recommendations on selecting indicators by which the risks of investment projects should be assessed are provided. It is explained in the article how exactly to use those indicators when approving investment projects in conditions of high uncertainty. It is noted that the investor's attitude to risk is one of the main factors in the decision-making process. It is considered in the article how to build and use “indifference” curves, and how to find the most effective projects from the point of view of solving the "risk-income" contradiction. To make the right investment decision, only knowing the profitability and risk of the evaluated projects is not enough. It is necessary to consider all qualitative factors that can affect the project's usefulness for the investor and make a choice according to the priorities of these factors. Recommendations are provided on making decisions that allow the investor to achieve the most “useful” result. It is noted that in each specific case, the optimal solution will be a compromise not only between the income and risk of the projects, but also between all the qualitative advantages and disadvantages of the projects under consideration, and this compromise solution is designed to ensure the maximum "usefulness" for the investor.

Keywords

• risk
• uncertainty
• investment project
• “indifference” curves
• probability of losses