Final answer:
Option 1 is true. Stocks have historically provided greater annual returns than cash, government bonds, and savings accounts due to their high risk-high reward nature, balanced by fluctuations that can significantly impact their values over short periods.
Step-by-step explanation:
Historically, stocks have indeed had far greater annual returns than cash, government bonds, and savings accounts, making Option 1: True. Over a sustained period of time, stocks exhibit a higher average return due to their potential for significant growth and decline. For example, after the S&P 500 declined by 37% in 2008, it increased by 26% in 2009. The fluctuations in bond values are less dramatic than stocks, attributable to variations in interest rates, but they still offer higher returns compared to the minimal changes in savings accounts.
The concept of risk versus return indicates that a higher risk level is typically associated with the potential for a higher return. This potential compensates investors for bearing the associated risks. Investment choices thus reflect a tradeoff: bank accounts are low risk with low returns; bonds have a moderate level of both; and stocks carry the highest risk but also the possibility for the highest returns.
Understanding this relationship is essential for making informed investment decisions tailored to individual financial goals and timelines. For example, young investors with a longer time horizon may tolerate more risk in exchange for higher potential returns from stocks, whereas those nearing retirement often seek more security with bonds or savings.