Question

An investment adviser recommended a stock to his client, Jason. Jason read the company’s most recent financial report and found it is too complex for him to understand. Therefore, Jason decided to not to buy the stock. He understand he might lose a great opportunity, but he does not want to take a risk of loosing money either. What type of risk management strategy was used by Jason?

Answer 1

Jason used the risk management strategy of avoidance by deciding not to invest in a stock he did not understand, reflecting the tradeoff between return and risk, and preferring personal safety over potential gains.

Step-by-step explanation:

The risk management strategy used by Jason is called avoidance. By choosing not to invest in the stock due to his lack of understanding of the company's financial report, Jason is avoiding potential financial loss. This decision reflects the tradeoff between potential return and risk, which is a critical consideration for financial investors.

Personal preferences play a significant role in these decisions, and it is often recommended to assess risk and return within the context of different time frames. For those not professionally trained in the financial markets, such as Jason, it may be wiser to adopt a slow and steady investment strategy like diversification, rather than trying to outguess the market or select individual stocks with the hope of substantial gains.