Final answer:
The three criteria for considering an investment attractive are the expected rate of return, the risk involved, and the liquidity of the investment. Investors must balance these factors based on their individual goals and risk tolerance to choose the most suitable investments.
Step-by-step explanation:
Criteria for Assessing Investment Attractiveness
The attractiveness of an investment is determined by several key factors that investors must consider. There are three primary criteria for choosing whether an investment is attractive: the expected rate of return, the risk involved, and the liquidity of the investment. Each of these factors must be balanced according to the investor's individual goals and risk tolerance.
Expected Rate of Return
Investors typically seek investments that offer a favorable expected rate of return. This refers to the percentage of profit or growth that an investor anticipates earning from an investment over a specific period. A higher return is generally preferred, but it is often associated with a higher level of risk.
Risk Assessment
Assessing the risk of an investment is crucial. The risk refers to the possibility that the actual return on investment will differ from the expected return, including the potential for losing some or all of the original investment. Different types of financial assets carry varying levels of risk, so an investor should analyze these thoroughly.
Liquidity of Investment
Investors also consider the liquidity of an investment, which is the ease with which an asset can be converted into cash without significantly affecting its market price. Highly liquid investments, such as stocks, can be sold quickly. On the other hand, assets like real estate may take longer to convert into cash and might incur larger losses if sold under time constraints.
It is important for investors to balance these three criteria to form a diversified savings and investing portfolio that aligns with their financial goals.