Final answer:
The question pertains to investment concepts and calculating portfolio betas, highlighting the tradeoff between risk and expected returns across different investment types such as bank accounts, bonds, and stocks. The focus is on how a higher average return compensates for the higher degree of risk in assets like stocks.
Step-by-step explanation:
The question primarily deals with investment analysis and the concepts of expected rate of return, risk, and diversification in a portfolio context. Using the single-factor model, a portfolio which is comprised of 70% investment in a risky security and 30% in a risk-free asset is evaluated. The beta of the risky security is provided as 14, and the determination of the portfolio beta is requested.
However, aside from this task, an exploration into different investment options like stocks, bonds, and mutual funds is also presented, with a focus on expected returns, the risk involved, and the tradeoff between these two elements. The narrative emphasizes that higher risk is typically associated with the potential for higher returns, justifying why investors may choose riskier assets like stocks.
Bank accounts offer low risk and low returns; bonds typically have higher risk but provide higher returns compared to bank accounts, and stocks, while being the riskiest of these, also have the potential for the highest returns. The understanding of these relationships is crucial for investors wanting to align their preferences regarding risk, liquidity, and returns when building their investment portfolios.