If expected returns are too close to 1, it stops being worth it. No company is going to spend a billion dollars to make back a billion dollars + 50 cents. You can't compare the investment against a vacuum, you have to factor in the opportunity cost. If your investment doesn't have a better return than basic government bonds, people aren't going to take it
Expected returns are also just that: an expectation. Inferred from statistical data, prior patterns, and can be wrong, so any respectable company takes into account that it's a figure that could swing either way. It's one thing for an investment to go from an expected ROI of 3x to 2x, but to go from 1.01x to 0.8x is ruinous.
Different companies, depending on risk aversion and accessible capital are going to have a different minimum acceptable RoI. But >1 does not guarantee takers like you implied.
If expected returns are too close to 1, it stops being worth it
Yeah, so I worked in Asset Management for some of the biggest global investment banks.
Have you heard of this thing called leverage? And in a deflation/low inflation environment interest rates are zero or negative which means you get paid to leverage (see Yen carry trade)
So your point is objectively false. As long as expected return is positive money will flow to it. And in a high savings environment (that deflation causes in theory). Leveraging is even easier.
If your investment doesn't have a better return than basic government bonds, people aren't going to take it
And why do you assume government bonds aren't an investment? Government uses that money to invest in infrastructure which further reduces operating costs for the entire economy by reducing energy, water and transportation costs. (See China for a modern example)
So government bonds are very much a form of investment
Inferred from statistical data, prior patterns, and can be wrong, so any respectable company takes into account that it's a figure that could swing either way
Yeah, now we are talking abiut Sharpe ratios and drawdown. But that's getting way to technical and is outside the expertise of most economists. This is more finance, but it's a solved problem. You can use options to reduce volatility (not recommended for lay people)
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u/guto8797 12h ago
If expected returns are too close to 1, it stops being worth it. No company is going to spend a billion dollars to make back a billion dollars + 50 cents. You can't compare the investment against a vacuum, you have to factor in the opportunity cost. If your investment doesn't have a better return than basic government bonds, people aren't going to take it
Expected returns are also just that: an expectation. Inferred from statistical data, prior patterns, and can be wrong, so any respectable company takes into account that it's a figure that could swing either way. It's one thing for an investment to go from an expected ROI of 3x to 2x, but to go from 1.01x to 0.8x is ruinous.
Different companies, depending on risk aversion and accessible capital are going to have a different minimum acceptable RoI. But >1 does not guarantee takers like you implied.