Question

Smith and Jones are different when it comes to taking risk. Smith will assume much more risk than Jones. It follows that:________

Answer 1

Answer: e. c and d

Explanation:

Smith engaging in riskier actions or investments will mean that Smith has a higher probability of earning either a higher or lower income.

When investing in a risky investment, there will be a higher return attached to it. This is why Corporate bonds yield more than Treasury bonds. The higher risk is to compensate the investor (in this case Smith) for engaging in riskier behavior. If the investment is successful, the return will be paid meaning Smith gets a higher income than Jones who did not take the risk.

When investing in a risky investment, one must still remember that there is a reason the investment is considered risky. There is a higher chance that it will not pay out. Therefore, should Smith engage in more risk and it does not work out, Smith will earn a lower income than Jones who did not invest in the risky investment.