People who might need to retrieve part or all of their investment relatively soon, such as the elderly, are often advised to invest a higher percentage of their money in bonds, and thus a lower percentage in stocks, than people who can leave the investment untouched for decades. We know, however, that bonds typically have a lower rate of return than stocks. Why would people be advised to invest in assets that give lower average rates of return? Which sentence is true Although stocks have a higher rate of return in the long run, they are much more volatile, or riskier, in the short run. Therefore, there is a higher probability that the value of the stocks will be less than the original value of the investment for people who might need to withdraw the investment in the short run. Although stocks have higher average rates of return in the long run, bonds have higher average rates of return in the short run. Therefore, bonds are likely to be more profitable for people who might need to get their investment back in the short run. Since bondholders get paid before stockholders in the event of bankruptcy of a firm, the average "real" rate of return on stocks and bonds will be the same, with bonds being less risky. This is bad advice. People should always invest in whichever assets have the highest average rate of return.
People who might need to retrieve part or all of their investment relatively soon, such as the elderly, are often advised to invest a higher percentage of their money in bonds, and thus a lower percentage in stocks, than people who can leave the investment untouched for decades. We know, however, that bonds typically have a lower rate of return than stocks. Why would people be advised to invest in assets that give lower average rates of return? Which sentence is true Although stocks have a higher rate of return in the long run, they are much more volatile, or riskier, in the short run. Therefore, there is a higher probability that the value of the stocks will be less than the original value of the investment for people who might need to withdraw the investment in the short run. Although stocks have higher average rates of return in the long run, bonds have higher average rates of return in the short run. Therefore, bonds are likely to be more profitable for people who might need to get their investment back in the short run. Since bondholders get paid before stockholders in the event of bankruptcy of a firm, the average "real" rate of return on stocks and bonds will be the same, with bonds being less risky. This is bad advice. People should always invest in whichever assets have the highest average rate of return.
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter25: Portfolio Theory And Asset Pricing Models
Section: Chapter Questions
Problem 8MC: You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand...
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People who might need to retrieve part or all of their investment relatively soon, such as the elderly, are often advised to invest a higher percentage of their money in bonds, and thus a lower percentage in stocks, than people who can leave the investment untouched for decades. We know, however, that bonds typically have a lower rate of return than stocks.
Why would people be advised to invest in assets that give lower average rates of return ? Which sentence is true
Although stocks have a higher rate of return in the long run, they are much more volatile, or riskier, in the short run. Therefore, there is a higher probability that the value of the stocks will be less than the original value of the investment for people who might need to withdraw the investment in the short run.
Although stocks have higher average rates of return in the long run, bonds have higher average rates of return in the short run. Therefore, bonds are likely to be more profitable for people who might need to get their investment back in the short run.
Since bondholders get paid before stockholders in the event of bankruptcy of a firm, the average "real" rate of return on stocks and bonds will be the same, with bonds being less risky.
This is bad advice. People should always invest in whichever assets have the highest average rate of return.
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