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 Originally Posted by BananaStand
If you invest $1,000 and earn a 10% return, you've made $100
If you invest $10,000 and earn a 10% return, you've made $1,000
$1000 > $100
The return on each dollar change is marginal. I'm not sure why the firm assessed that if it just invested more it would profit more.
I'm only claiming to know all this based on one particular company that I audited as part of a forensic accounting engagement that my company had with the electric company in Vermont. They planned projects....the projects ran into problems that delayed them beyond the current fiscal year....so they spent the money on other, significantly less necessary stuff.
Why did they do that? Did they assess they would make the same rate of return on less quality investments? Why would they make that assessment?
The oversight board called them on it, disqualified a lot of their investments from the rate calculation
If it is the case that the firm assessed returns based on expectations about what the oversight board would do (it sounds like they did, but you can correct me on that if they didn't), then that explains some important perverse incentive problems that contributed to that weird investment strategy.
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