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If two investments have returns of 20% and the same amount of risk but:

InvestmentA: returns $200 requires more capital
InvestmentB: returns $50 requires much less capital than A

Is InvestmentA the better investment? Isn't the decision at this point weighed on the dollar amount of gains?

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    Depends (among other things) on how much capital is required. If investment A requires $1000 in capital, your assessment will depend greatly on whether you have $1000 to invest.
    – chepner
    Jul 8, 2019 at 18:25
  • Also 20% return (reflection of risk) in real live is a lot - so it makes sense to diversify investment and therefore going for the smaler amount and pick other Investments
    – Thomas
    Jul 8, 2019 at 18:42
  • @Thomas: That depends on the time horizon associated with the return. 20% (total, not annualized) over 3 years would be average. 20% over 10 years would be worse returns than a good savings account with FDIC insurance.
    – Ben Voigt
    Jul 8, 2019 at 18:59
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    Is InvestmentA the better investment? Before anyone can answer that, you have to define "better."
    – dwizum
    Jul 8, 2019 at 19:21
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    Question: "Investments A and B each return 20%. Which one is better?" Answers: ** Define "better". Depends on how much capital you have to invest. You should diversify and pick other investments. How much money do you have to invest? It depends on your time horizon. What are you going to do with the money you don't invest in A or B? You saved yourself from negative alpha. ** It reminds me of someone asking what time it is and being told how to build a clock :->)
    – Bob Baerker
    Jul 8, 2019 at 19:42

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This is a basic arithmetic. If investment A and investment B both provide a 20% return and investment A provides 4 times the dollar return than B then one must invest 4 times as much in A.

Given that they provided the same return, neither investment was better than the other.

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    "Given that they provided the same return, neither investment was better than the other." Abstractly, perhaps, but the details and one's situation could very much make one better than the other. How much of a burden is tying up $1k in an investment vs. $250? Is it guaranteed or expected returns (with what distribution?), one-shot or (independently?) repeatable, and what's your risk tolerance?
    – Kevin
    Jul 8, 2019 at 19:47
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Isn't the decision at this point weighed on the dollar amount of gains?

Not necessarily. Each has the same percentage return but other variables could some into play. How much capital do you have total? What are you going to do with the capital that you don't spend?

For example, suppose you have $200 total to invest. You also find Investment C with a 30% return that requires $150 total. Now Investment B is "better" because it leaves you $150 to invest in C. (Or, you'd spend the $150 on C and have $50 left to invest in B).

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I would say that on average, investment A was better because assuming in both situations, you have the same amount of capital overall, investment A helps the overall return more than B does.

In the case where say the market is up 30% then investment B I would say is better because you saved yourself from the the negative alpha that investment A would have had.

But on a more simple level, what Bob Baerker said is completely correct. If both people invested all their money and opportunity cost is not much of a factor then they are the same

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    You can't have both paragraphs one and three be true at the same time.
    – RonJohn
    Jul 8, 2019 at 19:37
  • I was just about to mention that.
    – Bob Baerker
    Jul 8, 2019 at 19:39
  • @RonJohn Yes you can because say in the first paragraph you have 10,000 total and you invest 1000 in A and the rest goes into an index fund with returns 10% then your total at the end of the year would be 11100 or a 1100 gain. If you had the same 10,000 with investment B then it would be a 1025 gain thus making A the better choice. However, the third paragraph is true when you have $250 as all you money if you are situation B and the person in situation A has $1000 total.
    – Gerold Astor
    Jul 8, 2019 at 20:46
  • @BobBaerker essentially what I was trying to say is what D Stanley said
    – Gerold Astor
    Jul 8, 2019 at 20:47

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