If stocks are riskier than bonds, why would a rational investor ever buy stocks?
What will be an ideal response?
Although stocks are riskier than bonds, the probable rate of return is also higher for stocks. For a higher return, some investors are willing to accept the higher risk. In addition, with diversification, it is possible to reduce the risk of the portfolio of investments. Although the risk of each individual stock may be high, the risk of the portfolio will generally be much lower. The rational investor will select a portfolio that gives acceptable risk for the expected return.
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Even though monopolistic competition results in inefficiency, it does have which of the following benefits for society?
A) Firms earn zero economic profit in the long run. B) Firms can earn an economic profit in the short run. C) Product variety benefits consumers. D) Marginal cost equals price in the long run. E) The premise of the question is incorrect because nothing in monopolistic competition justifies any economic inefficiency.
Positive externalities and high transaction costs make voluntary social cooperation difficult because they
A) are also obstacles to the effective working of democratically controlled governments. B) can be eliminated by government. C) can best be reduced by abandoning persuasion and voluntary cooperation. D) make government intervention necessary. E) make it easier for cartels to operate effectively.