low risk/low expected return strategy compared to high risk/high expected return strategy?

Question

How is a conservative approch to financing a firm's assets a low risk/low expected return strartegy whereas an aggressive approcah to financing is a high risk/high expected return strategy?

Answer 1

There was a story of a rich man in Colorado, he struck it rich in a mine. Someone persuaded him to get out and enjoy the world with his money. It was before planes and the only trains that went to his town were freight haulers. So it was suggested that he buy a car. He didn't drive he said. So, you are rich, hire a driver.

So he put the word out and three men applied for the job to be his driver. The rich man pointed to the road on the side of the mountain (Colorado was long famous for mountainside roads with no guard rails), "How close to the edge of that road can you drive?"

The first man said, "Within a foot, no problem."

The second man said, "Oh, I can drive within inches of the edge, no problem."

The third man hesitated. "If its alright with you, I intend to stay just as far away from the edge as I can."

The rich man shook the third man's hand and said, "You're hired!"

Risk makes for fun numbers to play with, but it is dangerous. That applies to mountain highways and common business.