Calculating the risks in making investment decisions

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Investment decisions involve weighing up the risk and the likely rewards of various options. It is often the riskiest alternatives that yield the highest possible gains while the least risky options may yield smaller rewards. Business decision makers therefore have to weigh up risk so as to provide the most suitable rewards for stakeholders including shareholders and customers. The starting point is a company’s overall aim which then filters down into a strategy, creating a balanced portfolio made up of numerous investments. This case study examines the processes involved in weighing up risks in order to create a balanced portfolio at BG Group, one of the leading energy businesses in the UK. The Case Study illustrates typical stages involved in deciding whether to bid for the right to explore for and develop new gas fields and, importantly, how much to bid. Before weighing up the risks, ethics are an integral part of BG Group’s considerations – i.e. making morally correct decisions, whether these be concerned with environmental issues, health and safety or any other decision involving the difference between ‘right and wrong’ behaviour. In other words the ‘best’ investment decision will balance economic, social and environmental considerations. More than just…

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