Final answer:
Common stocks typically exhibit the highest volatility compared to corporate bonds, treasury bonds, and preferred stocks, owing to their potential for large swings in value.
Step-by-step explanation:
The question involves understanding which investments have the highest volatility. Volatility refers to the degree of variation in investment returns over a certain period and is often considered a measure of risk. Common stocks are known for having significant price fluctuations, while the value of corporate bonds and treasury bonds (also known as notes) varies less. Preferred stock often has less volatility than common stocks but more than that of bonds.
Based on historical data, common stocks typically have the highest volatility due to their potential for large gains or losses in value, as evidenced by the significant changes in the S&P 500 index in consecutive years. Therefore, the correct answer to the question 'Volatility is likely to be highest in which of the following investments?' is a) common stocks.
Investment spending is volatile because it is closely tied to economic conditions such as changes in interest rates, business confidence, and expectations of future growth.
These factors can fluctuate rapidly, leading to changes in investment decisions made by businesses. Policy changes by the government can have an impact on investment, but the extent of the impact may be limited by the volatility of investment. For example, a decrease in interest rates may encourage businesses to increase investment spending, but if business confidence is low or there is uncertainty about the future economic outlook, this may not translate into increased investment.