Final answer:
Riskier securities are expected to have higher expected returns to compensate for the increased level of risk. This expectation is based on the relationship between risk and potential financial return, where higher risk is linked to the possibility of higher rewards.
Step-by-step explanation:
The question you've asked pertains to the relationship between risk and return in financial markets. Riskier securities are generally associated with higher potential returns to compensate investors for taking on additional risk. This concept is foundational to investment theory and is evidenced by the behavior of different types of securities over time. When analyzing investments, it is crucial to understand the expected rate of return, actual rate of return, and risk. The expected rate of return is typically an average over a period of time and represents what investors might anticipate earning from their investment. Meanwhile, risk assesses the probability that returns will deviate from this expectation, including the possibility of returns being much higher or lower.
So, to answer the question, riskier securities are expected to have higher expected returns. This is because investors demand a premium for taking on increased uncertainty. For example, stocks have historically offered higher returns than bonds or savings accounts, reflecting their higher risk.With regards to your specific choices, the correct answer would be a) higher expected returns because this outcome refers to what investors ideally seek when engaging with riskier securities. Investments with higher risk must offer higher expected returns, or else investors would be disinclined to invest.