Could volatilities fatten your returns?
/4th July 2018, Ricardo G Barcelona/ “Buy low, sell high” is sound tactical advice. Capital budgeting’s prescribed ideals negate the tactic’s benefits: “Reduce volatilities, fix prices and volumes”. When there is operational flexibility, firms supply only when they earn a profit, while avoiding losses by interrupting supplies when prices are too low. As a result, “risk aversion” swaps foregone value from higher prices for “conservative”, albeit mediocre returns. Old habits, however die hard: Intuitively, the avoided losses add to the firm’s value, as well as the higher returns, when prices…
