Question

A longer time horizon tends to imply greater ability:

a) To tolerate risk
b) To invest in short-term assets
c) To achieve high liquidity
d) To speculate on derivatives

Answer 1

a) To tolerate risk. A longer time horizon generally allows for greater ability to tolerate risk, as investors can endure short-term volatility for potential high returns from stock market investments over the long run. Young workers are often positioned to pursue such strategies, while those nearing retirement may opt for lower-risk investments.

Step-by-step explanation:

The question relates to the implications a longer time horizon has on an investor's capabilities. A longer time horizon generally implies a greater ability to tolerate risk. This is because investors with a long-term perspective can weather short-term market fluctuations and benefit from the high returns that stock market investments can yield over several years or decades. For individuals who are at the beginning of their careers, it often makes sense to invest a significant portion of their retirement savings in stocks or mutual funds due to their potential for higher returns compared to bonds or bank accounts. Over time, the ups and downs of the stock market tend to even out, offering better returns for those who can invest for the long term. In contrast, those closer to retirement may prefer lower-risk investments that offer more certainty about their retirement income. Therefore, the tradeoffs between risk and return must be considered in the context of the investor's life stage.