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Fact checked by Suzanne Kvilhaug
Reviewed by Andy Smith

The Caste System: An Overview

Discrimination against individuals based on caste would seem to be a relic of the past. Even in India, where the caste system was most rigid, the practice has been officially banned since 1950.

Essentially, a caste system is a rigid assignment of social status based on inheritance. Recent history shows that caste discrimination has by no means disappeared, even in the United States.

In the Hindu caste system, people are placed at birth into “varna” and “jati,” social groups within a strict hierarchy. Historically, caste assignment restricted the individual to certain occupations. Castes did not intermingle.

In various forms, such discrimination has existed in many nations. Generations of immigration have brought issues of caste to the U.S.

Key Takeaways

• Caste system discrimination is the exclusion of individuals from opportunities based on the social level of their families.
• Caste discrimination continues to be linked to poverty, lack of access to public resources, and a lack of job opportunities.
• Even in countries that have outlawed discrimination, issues of caste discrimination are being raised.

Historical Context of Caste System

The modern caste system developed in India. The fragmentation of the Mughal Empire led, in the centuries before the British Raj, to the spread of caste archetypes as a way to cement political legitimacy and social status.

These drew on traditional Hindu social stratifications that many scholars believe traded on notions of ritual purity and contamination. During British rule, caste became a convenient and useful shorthand for the complexities of the region.

By the time of the India independence movement, attempts to topple caste dynamics had gained ground. In 1950, India’s constitution banned caste discrimination and launched a quota system meant to rectify historical injustices against the lowest castes.

However, many argue that caste discrimination still persists in far-reaching ways to this day.

Modern Caste System Discrimination

Caste encourages exclusion, which creates or worsens inequality for those who find themselves at the bottom of its hierarchy. Within the Indian caste system, occupations were historically inherited. That, combined with social stratification—especially through endogamy, which allows people to marry only within their castes—created a rigid system.

Although perceptions of outright discrimination within India are low, there’s evidence that these rigid social distinctions continue to play a role in contemporary life.

There are stark examples of discrimination, too.

Those in disfavored jatis, particularly in rural areas, have reportedly been forced to sell their children into debt bondage—in places where legislation against the practice isn’t fully imposed—or are themselves forced into low-paying work like cleaning waste.

Segregation by caste is linked to lack of education, poor health, and even deficient access to humanitarian relief after disasters.

Impact of Caste Discrimination

For someone living within it, a caste system restricts education, occupation, and the ability to practice one’s religion. Practically, at the community level, caste fuels inequality, as the system allows for the control of resources by higher castes.

There is a strong gender element to the ramifications of caste as well. Women who belong to a “scheduled caste”—one that falls low in the hierarchy—suffer higher incidents of domestic violence, according to a study in the National Library of Medicine.

Illegalizing the Caste System

B.R. Ambedkar, an early critic of caste inequality, wanted to reshape Indian society on democratic and egalitarian principles. For him, this meant an annihilation of caste, an oppressive hierarchy that led necessarily to inequality by controlling resources and opportunities within a closed system.

Ultimately, for Ambedkar, ending caste meant breaking away from the traditional beliefs that justified it, something that would happen through a mix of reforms, laws, education, and marriages between castes.

Ambedkar was instrumental in making caste discrimination illegal in India. He also influenced “reservation,” a form of affirmative action for public jobs written into India’s constitution that seeks to redress caste discrimination. 

The reservation system was revised in 2019 to focus more on economic status than caste designations.

Modern Remnants of Caste System

Some researchers and academics have found evidence that caste continues to influence life outcomes, which might even have been worsened by the COVID-19 pandemic.

Ashwini Deshpande, a professor of economics at Ashoka University in India, has argued that data from India concerning job losses during the pandemic suggested that differences in job losses between castes could not explained by education, industry, or occupation. This data suggests, Deshpande and her co-author wrote, that “caste is not merely a proxy for class, and identity-based policies might be essential to overcoming these disparities.”

The Anti-Caste Movement

Within the caste system, a group known as Dalits occupied the lowest rung of the hierarchy. They were deemed “untouchables.”

Post-independence, electoral politics have given Dalits a means to relieve some of the ill effects of caste. But many feel that these have insufficiently weakened the impact of caste.

Perhaps unsurprisingly, resistance has taken a variety of forms.

One example: Caste discrimination may have increased religious conversion from Hinduism, with which the caste system is popularly affiliated, into Christianity and Islam.

Violence against Dalits has occasionally inspired more radical political groups, such as the Dalit Panthers, a social and political organization popular in the second half of the 20th century that modeled itself on the Black Panther Party in the U.S.

International Perspectives

International observers tend to emphasize the role of caste discrimination in furthering inequality.

Human Rights Watch, a nonprofit human rights advocacy group, has called caste “a hidden apartheid of segregation, modern-day slavery, and other extreme forms of discrimination, exploitation, and violence.”

Elsewhere, advocates have termed belonging to an “untouchable” jati a “social disability.”

Those such as Rita Izsák-Ndiaye, a former United Nations Special Rapporteur on minority issues, believe that castes violate international principles of universal human dignity and equality because they subjugate some groups of people below others while fortifying poor socioeconomic circumstances for “lesser” castes.

Caste Issues in the U.S.

Issues related to caste have arisen in the U.S. in recent years, particularly in communities and regions that have substantial populations of immigrants from nations where caste systems are, or were, in place.

The city of Seattle, Washington, passed the first such law outside of Asia in 2023, in response to pressure from some of the state’s 150,000 Indian American residents, who argued that caste discrimination should be included among the discriminatory practices prohibited by law.

A similar state-wide measure in California was passed by the state’s legislature but vetoed by Gov. Gavin Newsom in 2023 on the grounds that the state’s current laws against discrimination protected against caste bias, even if not explicitly.

Prejudice produced by caste distinctions has become a management concern as well, with notable corporations beginning to address the issue. Alphabet, Amazon, Apple, and Del are among the companies that have policies addressing caste discrimination.

Is Caste Discrimination a Problem Outside of Asia?

The word caste is most often associated with modern India but effective caste systems have existed throughout the world.

In modern times, diaspora communities have noted that caste discrimination continues to harm their lives. Some large U.S. corporations have put anti-caste discrimination policies in place. Seattle was the first U.S. city to explicitly outlaw caste discrimination, in 2023.

What Role Does Caste Play in People’s Lives?

A caste system determines an individual’s access to education, jobs, and opportunities of all kinds based strictly on birth.

Does India Have Affirmative Action?

India has a quota-based affirmative action program, usually called “reservations,” that is written into its constitution. The program was intended to alleviate the inequality suffered by disfavored “jatis.”

In 2019, the program was altered to reserve resources more broadly for “economically weaker groups.” In 2023, India’s Parliament passed a law to create a reservation system ensuring that women would hold 33% of the seats in state legislatures and the lower House of Parliament.

The Bottom Line

Caste system discrimination turns a rigid social hierarchy into a system of exclusion. Those at the bottom of the hierarchy face severe deprivation and limited opportunity.

Remnants of the caste system continue today in nations around the world. Some are being addressed with a goal of eradicating discrimination based on birth.

Reviewed by David Kindness
Fact checked by Vikki Velasquez

The Social Security program was established in 1935 to provide retirement income for certain U.S. workers. It was later expanded to cover most of the country’s workforce and remains America’s pension plan and the financial lifeline many people use to stay afloat during retirement.

In 2025, nearly 69 million Americans per month will receive a monthly Social Security benefit, totaling roughly $1.6 trillion in paid benefits. Social Security benefits represent about 31% of the income of people over age 65.

Key Takeaways

• Social Security income is an important public pension system in the United States.
• Americans become eligible for Social Security benefits at age 62, but benefit amounts depend on how early individuals elect to start.
• Full retirement benefits are paid at age 67 for people born in 1960 or after, and age 66 for those born from 1943 to 1954.

1. When Am I Eligible?

Individuals are eligible for full retirement benefits as early as 65 or as late as 67. If you opt to receive Social Security at age 62, monthly benefits are permanently reduced. For example, for those who take benefits at 62 with a full retirement age of 66, benefits are reduced by 25%.

Those who postpone benefits past full retirement age are rewarded with a higher benefit: 8% for each year up to age 70 for those born in 1943 or later, when benefits max out and there is no further incentive to delay signing up.

• If you were born before 1938, your full retirement age is 65.
• If you were born from 1938 to 1942, the age ranges from 65 and two months to 65 and 10 months.
• If you were born from 1943 to 1954, it’s 66.
• If you were born from 1955 to 1959, it ranges from 66 and two months to 66 and 10 months.
• If you were born in 1960 or later, it’s 67.

2. How Is Eligibility Determined?

Eligibility for Social Security is based on credits earned during an individual’s working years. As of 2025, for every $1,810 you make, one credit is earned, up to a maximum of four per year. If you were born in 1929 or later, you need 40 credits or 10 years of full-time work to receive Social Security benefits.

3. How Much Do I Pay in?

As of 2025, workers pay 6.2% of their wages into Social Security, up to $176,100 of their income. Employers contribute another 6.2%. Self-employed individuals have to pay both portions, or 12.4%.

Tip

You can collect Social Security retirement benefits even if you’re still working.

4. How Much Will I Get?

Social Security benefits are based on lifetime earnings. The formula is complicated, but it averages the income from your 35 highest-earning years. If you already accumulated 40 Social Security credits, you can use the online Social Security Retirement Estimator to calculate your benefit.

5. Can I Get Social Security If I Work?

Individuals can receive Social Security benefits while they work. If you’ve reached full retirement age, you can earn as much as you’d like and receive full benefits. If you’re under full retirement age, your benefits are temporarily reduced. Social Security will credit the reduction to your record when you reach full retirement age, resulting in a higher benefit.

The reduction is $1 for every $2 of earned income over $23,400 in 2025 for those younger than full retirement age. The year you reach full retirement age, benefits will be reduced by $1 for every $3 in income over $62,160 in 2025 and continue until the month when you become fully eligible.

Important

Retirees can contribute to individual retirement accounts (IRAs) as long as they have earned income. However, Social Security benefits are not considered earned income for this purpose.

6. How Does the Spousal Benefit Work?

Spouses can claim benefits regardless of whether they ever held paid jobs based on their partner’s record. To qualify, the spouse with a work history must be receiving retirement or disability benefits, and the nonworking spouse must be at least age 62.

Spousal benefits are permanently reduced if the nonworking spouse collects before full retirement. If the nonworking spouse waits until full retirement age, they will receive a spousal benefit of up to 50% of their partner’s full retirement benefit.

Widowed spouses become eligible for 100% of their partner’s full benefit unless the benefit they’ve earned through their income is higher. Generally, the widowed spouse must be at least 60 years old to receive benefits from the deceased spouse’s record, and the amount will be reduced if the surviving spouse elects to receive benefits before their full retirement age.

Important

If a surviving spouse remarries before age 60, they will forfeit the deceased spouse’s benefit. In some cases, divorced spouses are also eligible for spousal benefits based on their former partner’s record.

7. Do I Owe Taxes on Social Security?

Individuals pay federal income taxes on their benefits if their combined income, which includes 50% of their benefit amount plus any other earned income, exceeds $25,000 per year for single filers. For those who file jointly, the income limit is $32,000.

8. How Do I Apply for Benefits?

You can apply at a local Social Security office, by phone (1-800-772-1213), or online. Applications require documents such as a birth certificate. Social Security Form SSA-1 has a complete list. The Social Security Administration (SSA) allows individuals to apply up to four months before the date they want their benefits to start.

9. How Is Social Security Funded?

Money paid in by current workers through taxes is used to pay the benefits for current retirees. Any remaining money goes into the Social Security Trust Fund, used in future years when current contributions become insufficient to cover all of the program’s obligations.

Two trust funds pay retirement benefits: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. By law, the money in the trust funds is invested in U.S. government securities.

10. Is Social Security in Trouble?

The Social Security system faces financial challenges as fewer workers pay into the system for every retiree who is drawing money out. People are living longer than when the program was envisioned in the 1930s and collecting benefits for more years.

The two funds that maintain Social Security are the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays Social Security retirement benefits, and the Disability Insurance (DI) Trust Fund, which pays Social Security related to disability. According to the 2024 Trustees Report, the retirement program is projected to pay full benefits until 2035, when the trust fund will be depleted. After this, 83% of scheduled benefits will be paid with continuing tax income.

As of 2024, the OASI Trust Fund is expected to be depleted by 2033, when it will only pay out 79% of benefits. The Disability Insurance (DI) Trust Fund is projected to pay 100% of total scheduled benefits through 2098.

What Is the Maximum Social Security Benefit You Can Get?

In 2025, the maximum Social Security benefit for someone retiring at full retirement age is $4,018. The full retirement age is 66 to 67, based on the date of birth.

Should You Take Social Security at 62 or 67?

You can start receiving retirement benefits at 62 years old, but the amount will be higher if you wait until the full retirement age, which is either 66 or 67, depending on when you were born. Those who wait even longer, until age 70, can see an increase in benefits each year until retiring.

How Much Is the Social Security Cost-of-Living Adjustment?

The Social Security cost-of-living adjustment (COLA) for 2025 is 2.5%. The COLA is determined using a formula outlined in the Social Security Act to help beneficiaries keep up with inflation. The formula uses increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the previous year when a COLA was approved to the third quarter of the next year.

The Bottom Line

Social Security is a popular and important pension in the lives of Americans during their retirement years. Knowing how to manage the ins and outs and understanding the benefits of Social Security allows individuals to maximize their benefits.

People who file after full retirement age may be eligible for a lump sum

Reviewed by Margaret James
Fact checked by Vikki Velasquez

Even people who have never paid into the Social Security system may be eligible for spousal benefits if they are married (or were formerly married) to someone who has contributed to it. In some instances, they may also be able to apply for retroactive benefits.

Key Takeaways

• Social Security spousal benefits are available to people whose spouses paid into the Social Security system, even if they never did so themselves.
• Spouses who apply at their full retirement age may be eligible for a benefit equal to 50% of the other spouse’s benefit.
• If spouses wait past their full retirement age to apply, they may be eligible for up to six months’ worth of retroactive benefits, in the form of a lump-sum payment.

How Retroactive Benefits Work

Retroactive benefits are a one-time payment that the Social Security Administration (SSA) can make to people who delay filing for retirement benefits beyond their full or “normal” retirement age (66 for many, 67 for those born in 1960 or later).

In other words, if you file for benefits after you’ve reached your full retirement age, you can request a retroactive benefit to reimburse you for the monthly payments you’ve missed. However, the most you can receive is six months’ worth of benefits.

For people who are filing for regular, non-spousal retirement benefits, there is a tradeoff. By filing for retroactive benefits back to the month they reached full retirement age, they lose the delayed retirement credits they would otherwise have earned. With spousal benefits, however, delayed retirement credits don’t apply, so there is no downside to requesting a retroactive benefit.

What Is Social Security?

Social Security is the Old-Age, Survivors, and Disability Insurance (OASDI) program in the United States. It’s run by the Social Security Administration (SSA), a federal agency. It’s best known for retirement benefits, but it also provides survivor benefits and income for workers who become disabled.

Has Social Security Always Offered Spousal Benefits?

No. Social Security was created in 1935, but spousal benefits were not offered until 1939. Wives could collect such benefits then, but husbands did not begin collecting such benefits until 1950. The Social Security Administration began offering spousal benefits for same-sex married couples in 2015, after the U.S. Supreme Court ruled that same-sex couples have a constitutional right to marry.

What Are the Maximum and Minimum Social Security Spousal Benefits?

You are entitled to up to 50% of the amount your spouse is eligible to receive at their full retirement age. You could also receive as little as 32.5% if your spouse files for benefits before full retirement age.

The Bottom Line

If you’ve waited to apply for Social Security spousal benefits past your full retirement age, you may be eligible for a retroactive payment. That said, the simplest way to apply for spousal benefits is to do so at your full retirement age and start collecting them right away.

Because retroactive benefits are a relatively obscure option, it’s best to seek out a knowledgeable counselor at your Social Security office for guidance.

Reviewed by David Kindness
Fact checked by Vikki Velasquez

The internal rate of return (IRR) is frequently used by companies to analyze profit centers and decide between capital projects. But this budgeting metric can also help you evaluate certain financial events in your own life, like mortgages and investments.

The IRR is the interest rate (also known as the discount rate) that will bring a series of cash flows (positive and negative) to a net present value (NPV) of zero (or to the current value of cash invested). Using IRR to obtain net present value is known as the discounted cash flow method of financial analysis.

Key Takeaways

• The internal rate of return (IRR) is the interest rate that will bring the net present value of a series of cash flows to zero.
• Corporations use IRR to estimate the present value of future cash flows from a potential investment.
• IRR calculations can be very complex, but can easily be calculated using accounting software or spreadsheet programs like Excel.

Uses of Internal Rate of Return (IRR)

As we mentioned above, IRR is a key tool in corporate finance. For example, a corporation will evaluate investing in a new plant versus extending an existing plant based on the IRR of each project. In such a case, each new capital project must produce an IRR that is higher than the company’s cost of capital. Once this hurdle is surpassed, the project with the highest IRR would be the wiser investment, all other things being equal (including risk).

IRR is also useful for corporations in evaluating stock buyback programs. Clearly, if a company allocates a substantial amount to a repurchasing its shares, the analysis must show that the company’s own stock is a better investment—that is, has a higher IRR—than any other use of the funds, such as creating new outlets or acquiring other companies.

Calculation of Internal Rate of Return (IRR)

The IRR formula can be very complex depending on the timing and variances in cash flow amounts. Without a computer or financial calculator, IRR can only be computed by trial and error. The Excel IRR function can help you accomplish this task much easier.

One of the disadvantages of using IRR is that all cash flows are assumed to be reinvested at the same discount rate, although in the real world, these rates will fluctuate, particularly with longer-term projects. IRR can be useful, however, when comparing projects of equal risk, rather than as a fixed return projection.

The general formula for IRR that includes net present value is:

$begin{aligned} 0 &= CF_0 + frac{CF_1}{(1 + IRR)} + frac{CF_2}{(1 + IRR)^2} + dotso + frac{CF_n}{(1 + IRR)^n} \ &= NPV = sum^N_{n = 0} frac{CF_n}{(1 + IRR)^n} \ &textbf{where:}\ &CF_0=text{Initial investment/outlay}\ &CF_1, CF_2, dotso, CF_n=text{Cash flows}\ &n=text{Each period}\ &N=text{Holding period}\ &NPV=text{Net present value}\ &IRR=text{Internal rate of return}\ end{aligned}$0​=CF0​+(1+IRR)CF1​​+(1+IRR)2CF2​​+…+(1+IRR)nCFn​​=NPV=n=0∑N​(1+IRR)nCFn​​where:CF0​=Initial investment/outlayCF1​,CF2​,…,CFn​=Cash flowsn=Each periodN=Holding periodNPV=Net present valueIRR=Internal rate of return​

Warning

IRR calculations do not account for the riskiness of a proposed investment.

Example of Internal Rate of Return Calculation

The simplest example of computing an IRR is by taking one from everyday life: a mortgage with even payments. Assume an initial mortgage amount of $200,000 and monthly payments of $1,050 for 30 years. The IRR (or implied interest rate) on this loan annually is 4.8%.

Because the stream of payments is equal and spaced at even intervals, an alternative approach is to discount these payments at a 4.8% interest rate, which will produce a net present value of $200,000. Alternatively, if the payments are raised to, say $1,100, the IRR of that loan will rise to 5.2%.

Here’s how the above formula for IRR works using this example:

• The initial payment (CF₁) is $200,000 (a positive inflow)
• Subsequent cash flows (CF₂, CF₃, CF_n) are negative $1,050 (negative because it is being paid out)
• Number of payments (N) is 30 years x 12 = 360 monthly payments
• Initial Investment is $200,000
• IRR is 4.8% divided by 12 (to equate to monthly payments) = 0.400%

Internal Rate of Return and the Power of Compounding

IRR is also useful in demonstrating the power of compounding. For example, if you invest $50 every month in the stock market over a 10-year period, that money would turn into $7,764 at the end of the 10 years with a 5% IRR, which is more than the current 10-year Treasury (risk-free) rate.

In other words, to get a future value of $7,764 with monthly payments of $50 per month for 10 years, the IRR that will bring that flow of payments to a net present value of zero is 5%.

Compare this investment strategy to investing a lump-sum amount: to get the same future value of $7,764 with an IRR of 5%, you would have to invest $4,714 today, in contrast to the $6,000 invested in the $50-per-month plan. So, one way of comparing lump-sum investments versus payments over time is to use the IRR.

Internal Rate of Return and Investment Returns

IRR analysis can be useful in dozens of ways. For example, when the lottery amounts are announced, did you know that a $100 million pot is not actually $100 million? It is a series of payments that will eventually lead to a payout of $100 million but does not equate to a net present value of $100 million.

In some cases, advertised payouts or prizes are simply a total of $100 million over a number of years, with no assumed discount rate. In almost all cases where a prize winner is given an option of a lump-sum payment versus payments over a long period of time, the lump-sum payment will be the better alternative.

Another common use of IRR is in the computation of portfolio, mutual fund or individual stock returns. In most cases, the advertised return will include the assumption that any cash dividends are reinvested in the portfolio or stock. Therefore, it is important to scrutinize the assumptions when comparing returns of various investments.

What if you don’t want to reinvest dividends, but need them as income when paid? And if dividends are not assumed to be reinvested, are they paid out or are they left in cash? What is the assumed return on the cash? IRR and other assumptions are particularly important on instruments like whole life insurance policies and annuities, where the cash flows can become complex. Recognizing the differences in the assumptions is the only way to compare products accurately.

What Are the Problems With Internal Rate of Return?

The internal rate of return can sometimes give a distorted view of capital returns, especially when viewed without considering the context of each investment. One major assumption is that any interim cash flows from a project can be invested at the same IRR as the original project, which may not necessarily be the case. In addition, IRR does not account for risk—in many cases, investors may prefer a project with a slightly lower IRR to one with high returns and high risk.

What Is a Good Internal Rate of Return?

There’s no fixed rule for what makes a “good” internal rate of return, except that a company’s IRR for a project should exceed its cost of capital. Typical returns from a capital investment will vary depending on the industry and the type of investment. Using the real estate industry as a very general example, an IRR of 10% would be acceptable for very conservative projects, while risky ones might require an IRR greater than 20%.

What Does Internal Rate of Return Tell You?

The internal rate of return tells you how much a project or investment needs to make in order to break even, accounting for the cost of capital and the net present value of future cash flows. In other words, it is the interest rate that makes the present value of the expected income streams equal to the cost of the investment.

The Bottom Line

As the number of trading methodologies, alternative investment plans, and financial asset classes has increased exponentially over the last few years, it is important to be aware of IRR and how the assumed discount rate can alter results, sometimes dramatically.

Many accounting software programs now include an IRR calculator, as do Excel and other programs. A handy alternative for some is the good old HP 12c financial calculator, which will fit in a pocket or briefcase.

Reviewed by Thomas Brock
Fact checked by Suzanne Kvilhaug

CAPM: An Overview

Many investors use the capital asset pricing model (CAPM) as a way to estimate the potential return of a stock or other asset within the context of its intrinsic risk. Used primarily to analyze relatively risky investments, CAPM gives the investor a way to evaluate the stock’s potential reward given its potential risk and compare it to other alternative investments.

A Microsoft Excel spreadsheet can be used to calculate CAPM.

Key Takeaways

• CAPM can be used to help you build a portfolio of stocks that have the potential for the reward you seek given the level of risk you can accept.
• CAPM is most often used to evaluate riskier stocks.
• CAPM can be used with other metrics like the Sharpe Ratio when analyzing the risk-reward of multiple assets.

CAPM Formula

CAPM is one component of the efficient market hypothesis, which states that the current prices of assets in a financial market always reflect all of the information available to investors. The logical inference is that investors are unlikely to consistently pick stocks that outperform the wider market.

Calculating CAPM is meant to establish the so-called “efficient frontier.” That is, it helps identify the highest potential return for a given level of risk or the lowest level of risk for a desired level of return.

The formula for CAPM calculates the expected return of an asset (usually a stock) with the incorporation of several factors.

The CAPM formula is as follows:

As shown from the above equation, CAPM involves the risk-free rate of an investment like a U.S. Treasury bond, an asset’s beta, and the expected return of the market.

It is important to ensure that these values are all taken from the same time period. Here we use a 10-year time period.

To calculate an asset’s expected return, start with a risk-free rate (the yield on the 10-year Treasury), then add an adjusted premium. The adjusted premium added to the risk-free rate is the difference in the expected market return times the beta of the asset.

This formula can be calculated in Microsoft Excel as shown below. 

Understanding the CAPM

CAPM provides an expected return on the asset in focus. This expected return can be an important value for an investor when considering an investment.

Generally, the expected return matches the period of time used to find the expected market return. For example, the market may be expected to return 8% over ten years. Thus, the expected return of the stock is also calculated over ten years.

The CAPM is only an estimate and has several caveats. Mainly, the factors used in the CAPM calculation are not static. The risk-free rate, beta, and market risk premium all change nearly every day and will change more substantially in different market periods and environments or at least on an annual basis.

The CAPM is an important statistic, but it is not always best used on its own. That’s why it forms the basis for the efficient market hypothesis and the building of an efficient frontier curve.

Efficient Frontier Curves

An efficient frontier curve involves the integration of multiple assets and all of their expected returns. The efficient frontier uses CAPM to help create an efficient portfolio that tells an investor the optimal percentage of investment in each asset that will create the best theoretical return for a defined level of risk.

It’s worth noting that CAPM is not always fully realized because any investor striving for a balanced portfolio would not devote the entire portfolio to a single asset.

Calculating CAPM in Excel

Now let’s assume you want to find the CAPM of a stock you are interested in investing in. Let’s assume the stock is Tesla (TSLA). First, you want to set up your Excel spreadsheet.

By setting it up in the following format, you leave yourself the opportunity to build it out to create an efficient frontier curve and to analyze and compare the expected return of multiple assets or add other comparison metrics.

As you can see, the calculation is built with assumptions at the top that can be adjusted easily when changes are needed. This allows easy updates to the spreadsheet when assumptions change.

We assume a risk-free rate of 1% on the 10-year Treasury and a market return of 8% on the S&P 500 over 10 years. The S&P 500 is typically the best benchmark to use since most beta calculations are based on the S&P 500.

Example of CAPM Calculation

We find that Tesla has a beta of 0.48. The table also includes standard deviation which is the next data component needed when building out the efficient frontier.

To find the expected return of Tesla we use the CAPM equation modified for Excel syntax as follows:

• =$C$3+(C9*($C$4-$C$3))

This translates to risk-free plus (beta times the market premium). Using the $ sign helps keep the assumptions static so that you can easily copy the formula to the right for multiple assets.

In this case, we get an expected return of 4.36% for Tesla.

With this spreadsheet, we can now build out to the right for multiple assets. Say we want to compare Tesla to General Motors (GM). We can simply copy the formula in C10 to the right in D10. Then all we need to do is add in the beta for GM in cell D9.

We find a beta of 1.30 which gives us an expected return of 10.10%.

Investment Analysis

As shown by this example, there is a big difference between Tesla’s 4.36% and General Motors’ 10.10%. This mostly comes from the higher beta for General Motors vs. Tesla.

Broadly, this means that an investor is more highly compensated through return for taking on more risk than the market. Thus, the expected return values are generally best viewed alongside beta as a measure of risk.

What Is a Stock’s Beta?

A stock’s beta is a measurement of its risk in relation to the broader stock market. The beta of the S&P 500 is always 1.0. The beta of all other stocks changes almost daily.

The example above, for instance, calculates the CAPM of Tesla and General Motors for comparison. Tesla stock’s actual beta was about 2.51 as of March 23, 2025, and General Motors’ beta was 1.43. By the time you read this, both those numbers may have changed significantly.

How Do I Benefit from Calculating CAPM?

CAPM can help you compare the relative risk of a stock against its potential reward. If used consistently, it can help you construct an efficient portfolio that has the best chance of meeting the level of return you want to achieve.

What Can an Investor Do Using Microsoft Excel?

At its most basic, Microsoft Excel is a place to list your stocks and other investments and track their price movements from day to day. You can get that from any business or broker’s website. Excel has many more functions, however. It can calculate standard deviation, percentage of return, overall profit and loss, and more.

There are alternatives to Microsoft Excel, including Google Sheets and Apple Numbers, depending on your needs.

The Bottom Line

An efficient frontier takes multiple stock investing to the next level by seeking to plot the allocation of multiple stocks in a portfolio.

There are other metrics like the Sharpe Ratio which can be more easily used to help an investor gauge the risk-reward of one stock vs. another.

Reviewed by Ebony Howard
Fact checked by Vikki Velasquez

Autonomous Consumption vs. Induced Consumption: An Overview

Those with little to no income still have to spend money on living expenses, which is considered autonomous consumption by economists because consumers in this predicament have no choice but to dedicate all their income to these expenses.

Consumers who have and spend disposable income on non-essential items produce induced consumption. These consumers have money to spend or invest, even after all basic needs are met, and all necessary bills are paid.

Key Takeaways

• Autonomous consumption is the expenses consumers must incur regardless of income, such as food, shelter, and clothing.
• Induced consumption is spending that varies based on consumers’ disposable income.
• When consumers experience an increase in disposable income, the amount of induced consumption will likely grow.
• When consumers experience a decrease in disposable income, the amount of induced consumption will likely shrink.

Autonomous Consumption

Autonomous consumption is defined as expenditures taking place when disposable income levels are at zero. This consumption is typically consumer living necessities, but it can cause them to borrow money or withdraw from savings accounts.

Autonomous consumption occurs most often when people don’t have the income they need for necessities such as food, shelter, utilities, health care, and transportation.

Consumers in this predicament are forced to spend all of their income, and possibly money they don’t have, just for necessities. As a result, they end up in a spiral of debt and may have to resort to other means, such as high-interest payday loans, to cover their basic bills for shelter or food.

Note

Autonomous consumption can go up or down depending on foreseen or unforeseen events that may limit or take away income.

Induced Consumption

Induced consumption is consumption that varies based on disposable income. As disposable income rises, so does the rate of induced consumption. This consumption applies to all normal goods and services, such as electronics, vehicles, and extra food.

As the value of disposable income rises, it induces a similar rise in consumption. Induced consumption demonstrates the typical phenomenon of how expenditures increase as wealth grows: People begin to enjoy more lavish lifestyles, spending more often, making more purchases, and incurring greater expenses. When people have more disposable income, they are also in a better position to save or invest money to be used as future income.

What Is Autonomous Consumption?

Autonomous consumption is the term used by economists to refer to expenses that must be paid by consumers regardless of income.

What Is an Example of Induced Consumption?

An example would be a person who had money left over after ensuring living expenses were covered; they might use it to purchase a television.

What Is an Example of Autonomous Consumption?

An example of autonomous consumption is a consumer that only makes enough money to cover living expenses and have no money left over for any other spending.

The Bottom Line

Economists use “autonomous consumption” to refer to consumers’ ability to only afford basic living expenses. “Induced consumption” is used to refer to consumers’ ability to spend on non-living-expense-related items.

Value Chain Analysis: Advantages and Disadvantages

Reviewed by Somer Anderson
Fact checked by Suzanne Kvilhaug

What Is Value Chain Analysis?

Value chain analysis is an investigation of a business’s value chain, the full range of activities a company conducts to create a product or a service. The purpose of value-chain analysis is to increase production efficiency so that a company can deliver maximum value for the least possible cost.

Key Takeaways

• Companies use value chain analysis to determine the lowest-cost methods for delivering the most value.
• A company can gain a competitive edge and boost profits by analyzing the five primary and four supportive value chain activities and creating efficiencies in them.
• A primary disadvantage to this analysis is that a company’s overall vision and strategy may get lost or muddied when operations are broken down into fine segments.

Primary Value Chain Components

Companies conduct value chain analysis by scrutinizing every production step required to create a product, with the ultimate goal of delivering maximum value for the least possible total cost. There are many advantages of value chain analysis, all of which result in a company’s ability to understand and optimize the activities that lead to its competitive advantage and higher profit levels.

By thoroughly analyzing each of the following primary value chain activities, a company can ensure that the value it’s creating exceeds the cost associated with creating that value:

• Inbound logistics: Functions such as receiving, warehousing, and managing inventory.
• Operations: Procedures for converting raw materials into finished products.
• Outbound logistics: Activities directly involved in distributing the company’s final products to consumers.
• Marketing and sales: Activities aimed at enhancing visibility and targeting appropriate customers, such as advertising, promotion, and pricing campaigns.
• Service: Programs that enhance the consumer experience, such as customer service, maintenance, repair, refund, and exchange functions.

Support Activity Components

The following four support activities help make the primary activities more efficient:

• Procurement: How a company obtains raw materials.
• Technological development: Used at a firm’s research and development stage, entailing practices like developing manufacturing techniques and automating processes.
• Human resources (HR) management: Hiring and retaining employees who carry out the firm’s vision.
• Infrastructure: The composition of a company’s management team across its accounting, finance, and quality control silos.

Important

Support activities are generally denoted as overhead costs on a company’s income statement.

Steps to Value Chain Analysis

• Identify and classify all value chain activities
• Determine the activities’ cost and value drivers
• Learn about, review, and compare the competition’s value chains
• Identify the links between activities
• Determine competitive advantages and identify opportunities for reducing costs

Advantages of Value Chain Analysis

The primary benefit of conducting a value chain analysis is that it helps businesses increase customer value and profit margins. Additionally, the more often a value chain is analyzed, the more familiar management becomes, making it easier to identify improvement opportunities.

Disadvantage of Value Chain Analysis

There is one major potential drawback to value chain analysis: By focusing too granularly on micro details, the broader strategic view can get lost. After all, the primary purpose of value chain analysis is to evaluate company operations, segment by segment, to increase efficiency in each area.

However, value chain analysis does a poor job of linking each activity in the chain together. Consequently, it’s possible to lose sight of how the activities broadly interrelate. If this view is lost, it’s possible that the components will be more efficient on their own, but when combined, they might not be. Therefore, it’s important to exercise caution and not lose sight of how each component contributes to overall efficiency and profitability.

What Are the Benefits of Value Chain Analysis?

Value chain analysis allows businesses to identify opportunities to make their activities more efficient, increase customer value, and increase profitability.

What Is the Importance of Value Chains?

Value chains help businesses organize their activities into primary and secondary activities. Managing these value chain activities is key to increasing customer value and reducing costs.

What Are the Main Goals of Value Chain Analysis?

The goal of value chain analysis is to identify opportunities to reduce costs and increase value, ultimately delivering more value at lower costs for customers.

The Bottom Line

A value chain analysis is an evaluation of a business’s primary and secondary activities. The analysis is conducted to find ways to improve activities within a value chain and reduce costs, which should lead to better customer value at lower costs.

Fact checked by Yarilet Perez
Reviewed by Lea D. Uradu

Buying a home is one of the biggest investments that many Americans make in life. Few can afford a home outright with cash. Realizing the dream of homeownership means finding a mortgage lender who finds an individual worthy enough to advance them a loan.

Mortgages are an important part of the financial system. They can be complex, even more so when lenders don’t have their clients’ best interests at heart. Regulation of the mortgage industry is handled by the federal government through legislation enacted passed over the years.

Key Takeaways

• The federal government regulates the mortgage industry through a number of acts passed by Congress.
• Regulation Z in the Truth in Lending Act arms consumers with the information that they need to make informed decisions about interest rates, fees, and credit terms.
• The Real Estate Settlement Procedures Act (RESPA) prohibits real estate agents from receiving kickbacks and prevents lenders from demanding that borrowers use a preferred title insurer.
• You can report discrimination to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development.
• Consequences for violating regulation range from fines to permanent exclusion from the mortgage lending industry.

The Basics of Mortgage Regulation

Mortgage lenders must follow rules set by the federal government. These rules require lenders to treat borrowers fairly and equitably. Simply put, the federal government regulates the mortgage industry and does this through a variety of agencies and a host of congressional acts.

Both the Truth in Lending Act (TILA) and Regulation Z were designed to help protect consumers in their relationships with lenders. Under the regulations, lenders are required to disclose information about their products in a way that allows consumers to make meaningful comparisons. Prior to the act, consumers faced a barrage of confusing and misleading terms.

Warning

Mortgage lending discrimination is illegal. If you think that you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Housing and Urban Development (HUD).

Another key component to mortgage regulation is the Real Estate Settlement Procedures Act (RESPA). This act was enacted by Congress so that buyers and sellers are given disclosures about the full settlement costs related to home buying.

One of the more significant pieces of regulation is the Dodd-Frank Wall Street Reform and Consumer Protection Act, which Congress passed in 2010 following the subprime meltdown that contributed to the 2007–2008 financial crisis. Dodd-Frank aimed to deal with some of the problems that led to the subprime crisis such as predatory lending practices and lax mortgage qualifying standards. Congress relaxed provisions under Dodd-Frank in 2018, including easing escrow requirements for depository institutions or credit unions.

The financial crisis also led to government bailouts of Freddie Mac and Fannie Mae, which were put into conservatorship. The Federal Housing Finance Agency (FHFA) oversees both to ensure that the agencies continue to offer support for the mortgage market without the need for further government intervention.

Important

The passing of Dodd-Frank put more protections in place for consumers, but changes in 2018 relaxed some portions of the act.

Regulation Z’s Truth in Lending Act

Implemented by Regulation Z, the Truth in Lending Act was created in 1968 as a way to protect consumers from malicious, shady, or unfair practices by lenders and other creditors. Lenders are required to make full disclosures about interest rates, fees, terms of credit, and other provisions. They must also provide consumers with the steps they need to take to file a complaint, and complaints must be dealt with in a timely manner. Borrowers can also cancel certain kinds of loans within a specified time period. Having all of this information at their disposal gives consumers a way to shop around for the best possible rates and lenders when it comes to borrowing money or getting a credit card.

Real Estate Settlement Procedures Act (RESPA)

This act regulates the relationships between mortgage lenders and other real estate professionals—principally real estate agents—to ensure that no parties receive kickbacks for encouraging consumers to use certain mortgage services. The act also prohibits loan providers from making demands for large escrow accounts, while restricting sellers from mandating title insurance companies.

Who Enforces Mortgage Regulations?

The Consumer Financial Protection Bureau (CFPB), an independent government agency, was created to provide a single point of accountability to enforce financial and consumer protection laws. The Federal Reserve also supervises the banking industry, which extends to mortgage lenders. The U.S. Department of Housing and Urban Development (HUD) oversees Federal Housing Administration (FHA) programs, which have provided $1.3 trillion in mortgage insurance to homebuyers. The FHFA oversees the activities of mortgage market liquidity providers Fannie Mae and Freddie Mac.

Example of Mortgage Regulation

Depending on the violation, consequences of violating mortgage lending regulations vary wildly. For example, if a lender is found to be in willful violation of the TILA, they can actually be imprisoned for up to one year. However, the most common consequences are monetary penalties. TILA violations tend to carry fines up to $5,000. On the other hand, more severe cases may result in permanent exclusion from the mortgage lending industry.

Consider the case of RMK Financial Corporation which did business under the name Majestic Home Loans. RMK was cited as sending advertisements to military families, misleading borrowers to believe the company was affiliated with the U.S. government. In 2015, RMK was issued an agency order to prohibit such activities.

Over the next several years, RMK reportedly continued to deceptively engage with military families including using fake U.S. Department of Veteran Affairs seals, using FHA logos, and using language to imply its corporate structure. These actions were taken to deceive borrowers about interest rates, terms, loan requirements, or projected potential savings when refinancing.

In 2023, the CFPB permanently banned RMK from the mortgage lending industry. The regulatory agency stated their actions were to stop repeat offenders and permanent prevent the company from engaging with such customers. This includes being prohibited from advertising, marketing, promoting, administering, offering, or selling mortgage loans. RMK was also issued a $1 million fine to be paid out to CFPB’s victims relief fund.

Filing a Complaint

Consumers with complaints about mortgage lenders should first reach out to the CFPB via the agency’s website. It provides consumers with numerous tools to address lending complaints. The Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), and the National Credit Union Administration (NCUA) also invite consumers to contact them about mortgage lender complaints.

Have Mortgage Regulations Changed Because of 2020?

So far, the only mortgage regulations that have changed due to the 2020 financial crisis are related to mortgage servicing and forbearance. While changes still could be put in place to adjust mortgage lending regulations, none are currently on the books.

Why Were Mortgage Regulations Put in Place?

U.S. mortgage regulations are on a perpetual seesaw, with regulations put in place after a crisis and slowly eroded over time until the next crisis. The Financial Services Modernization Act of 1999 in part deregulated the lending industry. This is frequently viewed as a contributing factor to the subprime mortgage crisis. As a result of the financial crisis, many regulations on mortgages were put back in place with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Then, in 2018, reforms were passed in Congress, weakening Dodd-Frank.

What Would Happen If Mortgage Regulations Didn’t Exist?

If no mortgage regulations were in place, history has taught us that we would see a rise in predatory lending practices. These practices would fall hardest on people at a disadvantage in the lending process, such as first-time homebuyers who come from non-property-owning families and cultures. Those who lack the education to understand complex documents and who don’t have people they trust to ask would find themselves signing up for more expensive, more complex loan products than other borrowers who have more savvy and cultural advantages.

How Do Mortgage Regulations Protect Me?

Mortgage regulations protect all buyers, not just those at a disadvantage in the lending process. Every borrower receives detailed closing disclosures that allow for better understanding of mortgage terms and costs and is given set time periods by law to think over and cancel their loans, in addition to numerous other regulations that lead to more transparency and rights for borrowers in the lending process.

The Bottom Line

For borrowers looking to get approved for a loan, mortgage regulations can seem like unnecessary and tedious hoops to jump through. However, these regulations are in place to protect all of us. They protect individual borrowers from buying properties that they can’t afford to stay in and protect the economy as a whole from falling into another housing bubble driven by unscrupulous lending practices. Numerous regulative authorities and checks and balances are currently in place to try to prevent the 2008 crisis from reoccurring.

You have four options: You just have to choose

Reviewed by Chip Stapleton
Fact checked by Vikki Velasquez

Your Roth 401(k) Options

A Roth 401(k) works like a traditional 401(k) plan in that contributions are made through paycheck deferrals and assets held within the plan are tax-deferred until they are withdrawn in retirement. However, a Roth 401(k) plan is a post-tax option; contributions provide no upfront reduction to taxable income. Instead, Roth 401(k) contributions and earnings are tax-free when taken out after age 59½.

Once you leave your job with an employer offering a Roth 401(k) plan, you potentially have four options about what to do with your plan:

• You can maintain it with the original plan sponsor, depending on plan rules.
• You can transfer it to a new employer plan.
• You can roll it over into an individual Roth IRA.
• You can take a lump-sum cash distribution.

Key Takeaways

• If you leave your job, you may be able tol maintain your Roth 401(k) account with your old employer.
• Under some circumstances, you can transfer your Roth 401(k) to a new one with your new employer. You can also choose to roll over your Roth 401(k) into a Roth IRA.
• You can cash out your Roth 401(k) and take it as a lump-sum payment, but this may have tax implications and penalties.

1. Leave It

The majority of Roth 401(k) plan sponsors allow you to maintain your account with them after leaving your job. However, you no longer have the option to contribute directly to the plan, and you are limited to the investment options the plan provides.

This option is not always available, depending on your plan’s rules. If your Roth 401(k) balance is low (typically under $7,000) your plan administrator may force you out of the plan, and either roll the balance into an IRA or send you the balance as a taxable distribution.

Warning

If the balance of your Roth 401(k) plan is low, your plan administrator may force you to take a distribution. When this happens, you will have 60 days to roll the balance into a new plan or face taxes and penalties.

2. Transfer It

In some cases, you can transfer your Roth 401(k) plan balance to a new employer’s plan. This option is only available if your new employer offers a Roth 401(k) plan that allows transfers. Once a transfer is complete, the previous employer’s Roth 401(k) is closed, and your entire balance is held within the new plan. You will then be limited to the investment options of the new plan.

3. Roll It Over

A rollover is an option for your Roth 401(k) balance, either with the initial plan sponsor or with a new financial institution of your choice. A rollover transitions the Roth 401(k) balance into an individually held Roth IRA through a tax-free transfer. Under this option, you gain more control over your investment selections and have the opportunity to contribute additional funds if your annual income is below the legal threshold.

Important

If you choose to cash out your Roth 401(k), you are reducing the amount of money available to you during your retirement.

4. Cash It Out

You may also take a lump-sum cash distribution from your Roth 401(k) once you leave your job. There are, however, tax implications with distributions if you are under age 59½. You may also face a 10% early withdrawal penalty, except for certain cases—such as medical emergencies, childbirth expenses, or buying a first home. And, of course, if you cash out, you will lose the tax-free money your funds would have continued to earn until withdrawal and no longer have these Roth assets available to you in retirement.

What Is a Force Out Distribution?

A “force out” distribution can occur when an employee continues to hold a 401(k) or Roth 401(k) from an old employer after changing jobs. If the balance is below a certain threshold (typically $7,000), the plan administrator can force you to take a distribution for the entire balance. If that happens, you have 60 days to roll the funds over to a new plan. Otherwise, you may be liable for taxes and a 10% early withdrawal penalty.

What Happens to Your 401(k) When You Change Jobs?

You can normally keep a 401(k) or Roth 401(k) plan, even after you move on to a new job. However, if your balance is less than $7,000, the plan administrator may terminate your plan and send you a check for the balance. This counts as a taxable distribution, so it is your responsibility to roll or transfer the balance to a new plan in order to avoid taxes and penalties.

What Are the Disadvantages of Rolling a 401(k) into an IRA?

An IRA or Roth IRA has a larger universe of investments to choose from than a 401(k), making them an attractive target for rollovers. However, there are some disadvantages: 401(k) plans have greater creditor protections than IRAs, meaning that a lender may be able to pursue your IRA funds during a future bankruptcy. In addition, you may also have stock in your old employer in your 401(k) account, which gets special treatment for net unrealized appreciation. If you roll these shares to an IRA, this benefit disappears.

The Bottom Line

When you leave a job, you have the option of leaving your Roth 401(k) in place, moving to a new Roth 401(k) or Roth IRA, or cashing out the balance. It is important to understand the tax implications before making your choice.

Reviewed by Chip Stapleton
Fact checked by Suzanne Kvilhaug

Joint ventures are advantageous because businesses pool resources and share risk, expertise, and expenses to make a project successful and profitable for all parties involved. It is a common business strategy used among companies seeking to achieve a common goal or reach a specific consumer market.

When a joint venture is successful, participating companies share in the profit as agreed upon in their contract. Likewise, a failure in a joint venture results in all participating companies realizing a portion of the losses.

key takeaways

• A joint venture is a temporary partnership between companies that dissolves at a specific future date or when a project is completed.
• A joint venture affords each party access to the resources of the other participant(s), reducing the possibility of incurring additional expenses.
• Each company can maintain its identity and easily return to normal business operations once the venture is complete.
• Joint ventures also provide the benefit of shared risk.

Joint Ventures Share Resources and Responsibilities

More often than not, a company enters into a joint venture because it lacks the required knowledge, human capital, technology, or access to a specific market that is necessary to be successful in pursuing the project on its own. Coming together with another business affords each party access to the resources of the other participating company without having to spend excessive amounts of capital to obtain it.

For example, let’s say that Company A owns the facilities and manufacturing production technology that Company B needs to create and ultimately distribute a new product. A joint venture between the two companies gives Company B access to the equipment without purchasing or leasing it, while Company A is able to participate in the production of a product it did not incur costs to develop. Each company benefits when the joint venture is successful, and neither is left to complete the project alone.

Joint Ventures Provide Flexibility

Unlike a business merger or an acquisition, a joint venture is a temporary contract between participating companies that dissolves at a specific future date or when the project is completed. The companies entering into a joint venture are not required to create a new business entity under which the project is then completed, providing a degree of flexibility not found in more permanent business strategies. Also, participating companies do not need to give up control of their businesses to another entity, nor do they have to cease ongoing business operations while the joint venture is underway. Each company is able to maintain its own identity and can easily return to normal business operations once the joint venture is complete.

Note

Joint ventures are most commonly used to expand into foreign markets by partnering with local businesses.

Joint Ventures Spread Risk

Joint ventures also provide the benefit of spreading risk among the participating companies. Creating a new product or delivering a new service carries a great deal of risk for a business, and many companies cannot manage that risk alone. Under a joint venture, each company contributes a portion of the resources needed to bring the product or service to market, making the heavy financial burden of research and development less of a challenge. The risk of the project failing and negatively impacting profitability is lower because the costs associated with the project are distributed among each participating company.

What Is the Main Purpose of a Joint Venture?

Joint ventures allow businesses to combine resources, which saves them both time and money.

What Is a Reason a Firm May Decide to Form a Joint Venture?

One reason to form a joint venture is to share resources to accomplish a specific task or goal at a reduced cost for all participants.

What Are the 4 Types of Joint Ventures?

There are several types of joint ventures: horizontal, where competitors join each other; vertical, where businesses involved at different levels of a product or services join forces; project-based, where businesses join for one specific project; and functional, where parties join to improve functions such as marketing or research and development.

The Bottom Line

Joint ventures involve two or more businesses joining forces to bring a product or service to market they each would not be able to launch on their own. These ventures work to the advantage of all entities involved, reducing the costs and risks involved for each participant while providing opportunities for growth.