Question

Over the past 89 years, we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following answers correctly ranks investments from highest to lowest risk (and return), where the security with the highest risk is shown first, the one with the lowest risk last?a. Large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds. b. Small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills. c. Large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills. d. U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks. e. Small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, U.S. Treasury bills.

Answer 1

Answer:

B.

Explanation:

US Treasury bills are extremely low-risk because they are backed by the full faith of the United States government and are guaranteed to increase. Long-term government bonds are slightly higher risk because they aren't necessarily backed by the US government, and the risk is corroborated by slightly higher expected growth. Long-term corporate bonds are next highest because, similar to government bonds, they are long-term and as a result almost never decreased over their maturity. Stocks are the highest risk investment on this list (their volatility quickly becomes clear if you look at any stock market index), and small-company stocks are more volatile (high risk) than large-company stocks because they can go under easier with less of a financial cushion.