Final answer:
In general, riskier investment strategies offer the potential for higher returns to compensate investors for taking on additional risk. This risk-return tradeoff is evident when comparing bank accounts, bonds, and stocks. Investment preferences can vary based on an individual's life stage and tolerance for risk.
The statement that riskier investment strategies offer the potential for higher returns is generally true.
Step-by-step explanation:
.This is because there is a direct relationship between the expected return on an investment and the level of risk involved. Investment choices such as stocks, bonds, and bank accounts illustrate this tradeoff. Stocks, while being the riskiest, also have the potential for the highest returns, especially over an extended period. Bonds carry a moderate level of risk and offer higher returns than bank accounts, which are the least risky with correspondingly lower returns. The rationale behind this risk-return tradeoff is that investors need to be compensated with higher potential returns for taking on greater risk.
Historically, high-risk investment strategies can dramatically affect an investment portfolio, especially in shorter time frames where fluctuations are more prevalent. For long-term investing, such as planning for retirement, younger individuals might prefer high-risk investments like stocks because they have time for the market to even out. On the other hand, those closer to retirement might choose lower-risk investments for more stability.