Risk-Return Tradeoff

Risk-return tradeoff is a well-known economic theory, which turned into a self-fullfilling prophecy as generations of entrepreneurs, investors, and business managers have been drilled in it.  It is easy to draw this tradeoff on a chart, but the challenge is how to come up with the data points on the risk-return frontier.  As in the picture below, one may want to be at the star, but available benchmarks cover only the large dots. Of course, benchmarks can be  adjusted a little bit, but there will still be no good benchmarks to price out the star.

 Risk-Return tradeoff for Distributors

 

It may be best to start with the points that can be reliably benchmarked (using publicly available data or company’s internal benchmarks) and then choose one of them that is closest to the taxpayer’s perferences.  If necessary, one may also think about tweaking those benchmarks a bit to fit your own business model.  However, the worse is to start somewhere that is no where near any reasonable benchmarks. Put differently: know where your comparables are, you cannot be too far away from them!