Final answer:
It is false that investors will demand the same return on stocks each year, as stock returns fluctuate greatly. Over time, stocks may yield higher returns than bonds or savings accounts but with more risk. Investment choices depend on individual risk tolerance and life stage.
Step-by-step explanation:
The statement that investors are likely to demand the same return each year on an investment in common stocks is false. The returns on stock investments can fluctuate significantly from year to year due to a variety of factors, including market volatility, economic conditions, and company performance.
Over time, stocks have historically provided a higher average return compared to bonds and savings accounts, but this comes with a higher level of risk.
For instance, the S&P 500 saw a significant increase of 26% in 2009 after a sharp decline of 37% in 2008. Additionally, many mutual funds that attempt to outperform the market often fail to do so consistently over the long term.
Investors must understand the tradeoff between risk and return when making investment decisions. Stocks offer the potential for high returns over an extended period, but they are also associated with higher short-term risk. The choice of where to invest typically depends on an individual's risk tolerance, investment horizon, and life stage.
For example, younger investors may be more inclined to invest in stocks through mutual funds, which can spread out risks and reduce transaction costs, whereas those nearing retirement might prefer more stable investments such as bonds or savings accounts that provide a lower but more predictable return.