Investment decision under risk

Various situations are discussed such as that of a single enterpreneur or that of several owners. In addition, tradable securities may or may not exist. If such trade exists, investment risks can be hedged. But securities can be purchased for investment purposes, too; thus trade in securities does not necessarily favor real corporate investments. Crowding out of such investment projects is possible. The number of owners of a firm does not matter for the allocation of hedgeable risks. A larger number of owners permits a wider distribution of non-hedgeable risks, however. If a manager decides on investments, then his decisions depend also on his income which may be a function of the firm’s profits. He may display a strong interest in hedging corporate risks if corporate losses endanger his job. Whether or not he prefers forward to option contracts for hedging purposes, depends on his preferences. If he wants to preserve the change of high profits, then he prefers options. This paper applies risk theory to investment decisions of firms. It is not intended to derive decision rules which can be easily implemented in the real world; the purpose of the paper is to demonstrate the application of the same concept for decision making in widely different situations.