Final answer:
The correct statement is that the inflation rate sometimes exceeded the rate of return on Treasury bills from 1926-2016. Stocks on average return more than bonds, and bonds more than savings accounts, due to their respective risk levels. High risk investments are expected, on average, to yield high returns.
Step-by-step explanation:
The correct statement based on the historical returns for the period 1926-2016 is that the inflation rate exceeded the rate of return on Treasury bills during some years. This period saw fluctuating economic conditions where inflation at times outpaced the returns from low-risk investments such as Treasury bills. However, it is not historically accurate to say that Treasury bills yielded a higher return than long-term government bonds for the period, nor that small-company stocks outperformed large-company stocks every year. Moreover, bond prices are generally less volatile than stock prices, not more, due to their dependence on interest rate changes which are less dramatic compared to stock value fluctuations. Lastly, over the long term, small-company stocks have indeed often provided higher returns than large-company stocks due to the risk-return trade-off; high risk can potentially lead to high returns.
The understanding that over a sustained period of time, stocks have returned more than bonds, which in turn have returned more than savings accounts, is fundamental. This hierarchy of returns corresponds to the varying levels of risk associated with each type of investment. Additionally, while high risk does not guarantee high returns, it is the potential for higher returns that incentivizes investors to take on greater risk. Hence, investments with a high risk are expected on average to result in a relatively high return. Finally, when it comes to simple interest, the formula Principal + (principal × rate × time) is used to calculate the total amount returned from a loan or investment. Using this formula, an example of calculating the return on a $5,000 loan at 6% interest over three years would yield a total of $5,900.