Question

Which of the following is not correct? The higher average return on stocks than on bonds comes at the price of higher risk. Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk. Insurance markets reduce risk, but not by diversification. Risk can be reduced by placing a large number of small bets, rather than a small number of large bets.

Answer 1

Insurance markets reduce risk, but not by diversification. FALSE, INSURANCE MARKETS REDUCE RISK THROUGH DIVERSIFICATION.

The other statements are all true:

• The higher average return on stocks than on bonds comes at the price of higher risk. TRUE, BONDS ARE USUALLY LESS RISKY THAN STOCKS, BUT ALSO YIELD LOWER RETURNS
• Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk. TRUE, BEING RISK AVERSE MEANS THAT HIGHER RISKS MUST BE COMPENSATED BY HIGHER RETURNS.
• Risk can be reduced by placing a large number of small bets, rather than a small number of large bets. TRUE, THIS IS CALLED DIVERSIFICATION.