Question

Investors sometimes fear that a high-risk investment is especially likely to have low returns. Is this fear true? Does a high risk mean the return must be low?

a. True, high risk always corresponds to low returns.
b. True, low risk always corresponds to high returns.
c. False, high risk does not necessarily mean low returns.
d. False, high risk always guarantees high returns.

Answer 1

High risk does not necessarily equate to low returns; it signifies a wider range of possible outcomes but also the potential for higher returns as a compensation for the increased risk. Over time, high-risk investments like stocks have historically provided higher average returns than lower-risk investments.

Step-by-step explanation:

The fear that a high-risk investment is especially likely to have low returns is not true. The correct answer is c: False, high risk does not necessarily mean low returns. While high risk does increase the potential for loss, it also increases the potential for high return. This is because the expectation of higher returns compensates for the increased risk. Over time, while individual investments may fluctuate greatly, a diversified high-risk portfolio like mutual funds investing in stocks may yield higher average returns compared to lower-risk investments like bonds or savings accounts.