Identifying A Ponzi Scheme

If you are not familiar with a Ponzi scheme, it is generally a fraud in which early investors are paid out from contributions made by later investors. The Ponzi scheme usually ends when new investments dry up. A recent article on CFO.com highlights how to avoid a Ponzi scheme. We would like to make sure you read one particular concept, that is, "high returns with little or no risk." As we discuss extensively in the textbook, the only way to a higher return is with increased risk. Although we would all like higher returns with little or no risk, centuries of investment history show that such an investment is not possible. If it were, investors would flock to that investment, driving the return down.