The Risk-Return Tradeoff and Brand Architecture

Just like it is inherent to all personal relationships, ‘give and take’ is arguably a characteristic of the relationships between financial decision-making and the risk and return tradeoff just as it is described in the post. In actual relationships, one party cannot expect to receive something if it does not offer on its own turn; in other words, ‘you reap what you sow’ kind of a relationship. Similarly, in the risk-return tradeoffs, the financial decision making implies that low feasible returns are allied to low uncertainty levels whereas high feasible returns are associated with high uncertainty levels; thus, the greater the risk, the greater the expected return (Mohr et al., 2010).  For any firm or entity, the ‘risk and return trade-off guide’ the financial decisions (Mohr et al., 2010).

Financial Decision-Making and the Risk and Return Tradeoff Relationship

           Although the risk-tradeoff may not always reflect the brand architecture, it is important to note that this ‘brand architecture’ has a robust influence on a firm’s performance in addition to governing the effectiveness and efficiency of marketing resources. Furthermore, in the marketplace, the financial performance related to the stock market has a weak link with the brand’s performance (Mohr et al., 2010). The risk-return tradeoff may attract idiosyncratic risks such as brand stretch, brand cannibalization, brand dilution, and the brand reputation which may either be controlled or exacerbated through the brand architecture (Mohr et al., 2010). The brand architecture might not deliver on the risks and returns tradeoffs to the expectations of the firms.

In one way or another, firms have to face off the risk-return tradeoffs in their financial decisions if they are to measure growth and identify their competition from inevitable tradeoffs. Since every company desires to make favorable returns, their financial decisions should be guided by the goals they have set forth and their willingness to cater to high risks.

References

Mohr, P. N., Biele, G., Krugel, L. K., Li, S. C., & Heekeren, H. R. (2010). Neural foundations of risk–return trade-off in investment decisions. Neuroimage, 49(3), 556-563.