Final answer:
Real assets come with varying levels of risk and return, with issues such as the recent U.S. housing market crisis illustrating the potential downsides. Liquidity is another concern as converting such assets into cash can be challenging. The investment markets show that higher risk needs to be balanced with the potential for higher returns.
Step-by-step explanation:
Do virtually all real assets involve some risk? Yes, investing in tangible assets like housing, gold, or collectibles does involve varying degrees of risk. The rate of return is typically moderate for these types of investments, appreciating over time especially if they offer nonfinancial benefits (like residing in the property you own). However, the risk associated with these assets can be moderate, as in the case of housing, or it can be high, as seen with volatile markets for gold or collectibles such as baseball cards.
Another critical factor is liquidity. Liquidity is low for real assets, which means it often requires a significant amount of time and effort to convert the asset into cash, like selling a house or a piece of fine art. During the recent U.S. housing market crisis, many learned how a high-risk level could be detrimental, as plummeting house values led to financial distress for homeowners and investors alike.
Overall, the world of investment shows a clear tradeoff between expected return and degree of risk. Assets like stocks, known for higher risk, must offer higher returns to attract investors. Without the possibility of a higher average return, the appeal of these riskier investments would diminish significantly.