The correct answer is: A. Profitability varies inversely with risk
Profitability is a measure of how much profit a company makes relative to its revenue. Risk is the likelihood that a company will not be able to meet its financial obligations. In general, companies with higher profitability are considered to be lower-risk investments. This is because they are more likely to be able to generate enough cash flow to cover their expenses and make a profit.
There are a number of factors that can affect a company’s profitability, including its industry, its business model, and its management team. However, one of the most important factors is the company’s level of risk. Companies that take on more risk, such as by investing in new technologies or expanding into new markets, are generally more likely to generate higher profits. However, they are also more likely to experience losses.
Investors need to carefully consider the level of risk that they are willing to take when investing in a company. Companies with higher profitability may be attractive investments, but they also come with a higher risk of loss. Investors should carefully consider the company’s business model, its management team, and its industry before investing in any company.
Here is a brief explanation of each option:
- A. Profitability varies inversely with risk. This is the correct answer. In general, companies with higher profitability are considered to be lower-risk investments. This is because they are more likely to be able to generate enough cash flow to cover their expenses and make a profit.
- B. Liquidity moves together with risk. This is not necessarily true. A company can be both liquid and risky, or illiquid and safe. Liquidity refers to how easily a company can convert its assets into cash. A company with high liquidity is able to quickly sell its assets to raise cash, while a company with low liquidity may have difficulty selling its assets quickly. Risk refers to the likelihood that a company will not be able to meet its financial obligations. A risky company is more likely to default on its loans or go bankrupt.
- C. Profitability moves together with risk. This is not necessarily true. In general, companies with higher profitability are considered to be lower-risk investments. However, there are some exceptions to this rule. For example, a company that is investing heavily in new technologies may have high profitability but also high risk.
- D. Profitability moves together with liquidity. This is not necessarily true. A company can be both profitable and illiquid, or unprofitable and liquid. Liquidity refers to how easily a company can convert its assets into cash. A company with high liquidity is able to quickly sell its assets to raise cash, while a company with low liquidity may have difficulty selling its assets quickly. Profitability refers to how much profit a company makes relative to its revenue.