Marshall McBride inherited $10,000 from his Great Aunt Martha. He invested $5,000 in a new, risky start-up venture, 10th Generation, Inc., and the other $5,000 in Major Chemicals, Inc., a well-known chemical company that's been around for years. Today, his financial planner called to inform him that the Return on equity on 10th Generation = 6.28%; and, Return on equity on Major Chemicals = 10.50%. Which of the following facts is important information for Marshall McBride?
A) The return on equity on new companies is always lower than the return on equity of well-established firms.
B) Investors willing to take added risk, expect higher returns.
C) Return on equity is a liquidity ratio that has very little bearing on profitability.
D) If Marshall wants to know how well his investments are performing, he should employ leverage ratios such as the debt to equity ratio.

Question

Quizplus · Accepted Answer

This fact is important because it explains why Marshall chose to invest in a risky start-up venture, and it also confirms that higher returns are expected for higher risk investments. Options A, C, and D are incorrect because they either present inaccurate information or are not relevant to the given scenario.

Marshall McBride Inherited $10,000 from His Great Aunt Martha