BUISENESS MANAGEMENT
FINANCIAL MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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higher risk investments must earn higher returns.
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an investor who takes more risk will earn a higher return.
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a rational investor will only take on higher risk if he expects a higher return.
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an investor who bought stock in a small corporation five years ago has more money than an investor who bought U.S. Treasury bonds five years ago.
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Detailed explanation-1: -Answer and Explanation: The correct answer is (A). The principle of risk-return trade-off means that a rational investor will only take on higher risk if he expects a higher return. Rationality in the decision-making process involves making choices that yield optimal benefits or utility for an individual.
Detailed explanation-2: -First is the principle that risk and return are directly related. The greater the risk that an investment may lose money, the greater its potential for providing a substantial return. By the same token, the smaller the risk an investment poses, the smaller the potential return it will provide.
Detailed explanation-3: -What is a high-risk, high-return investment? High-risk investments may offer the chance of higher returns than other investments might produce, but they put your money at higher risk. This means that if things go well, high-risk investments can produce high returns.
Detailed explanation-4: -Definition: Higher risk is associated with greater probability of higher return and lower risk with a greater probability of smaller return. This trade off which an investor faces between risk and return while considering investment decisions is called the risk return trade off.
Detailed explanation-5: -That means that the higher return an investor wants, the greater risk they must accept. This is the risk-return trade-off that is inherent in all financial decisions.