Final answer:
Investors are induced to buy high-risk corporate stocks over risk-free government bonds due to the possibility of receiving much higher returns, which are seen as a reward for taking on the additional risk.
Step-by-step explanation:
An investor would be induced to purchase a high-risk corporate stock over a risk-free government bond due to the potential for a higher average return that compensates for the increased risk. While the government bond offers a guaranteed return with low risk, stocks present the possibility of substantially higher returns that align with the higher risk profile.
This is because the value of stocks can fluctuate significantly, which is also why they have historically outperformed bonds over the long term. The interest rate on a bond typically includes compensation for delaying consumption, adjusting for inflation, and a risk premium, but to attract investors to stocks, the potential return has to be sufficiently higher to justify the added risk of variable outcomes.
Investors who are risk-averse need a significant incentive to choose a riskier asset, and the prospect of a high return plays a critical role in this decision-making process. Therefore, when considering investment decisions, it's crucial to weigh the expected return against the associated risk level, as a higher risk investment must offer a higher expected return to be attractive.