Final answer:
Preferred stock typically offers less growth potential and hence a lower expected return compared to common stock, which has a higher potential for capital gains due to increased risk. This aligns with the principle that investments with higher risk are linked with higher potential returns over time. The correct option is B.
Step-by-step explanation:
The statement that preferred stock normally will provide a higher expected return than common stock is false. Preferred stockholders have a higher claim on assets and earnings than common stockholders, which often means they receive dividends before common stockholders.
However, the tradeoff is that preferred stocks typically have less potential for growth compared to common stocks due to their fixed dividend rates. In contrast, common stocks usually provide a higher expected return because they carry more risk. Stockholders are compensated for this risk with the potential for capital gains on top of any dividends received.
Investments follow the principle that a higher risk should be rewarded with a higher potential for return. Over time, stock investments have shown to return more than bonds or savings accounts due to their higher risk. It is essential to consider the trade-offs between risk and return, and how they align with an investor's time horizon and financial goals.