Question

In general, investing in stocks generates better returns than saving money in a bank. What is the best interpretation of the phenomenon?

• A. The stock market is way too risky, and no one should step into it.

• B. The return from savings accounts in a bank bears less risk than that from the stock market.

• C. Saving money in a bank is totally unattractive for a true investor.

• D. Banks do not pay any risk premium, so the return is lower.

Answer 1

B.The return from savings accounts in a bank bears less risk than that from the stock market.

Note;

Return on a savings account is less likely to diminish in value due to market factors, when compared to an investment in a stock.

An investment in a stock is subjected to risk of market factors, so it is more risky than a savings account.

This does not mean no one should step in stock market.

A true investor will not mind having some amount in savings account, because of the liquidity it offers.

The risk premium offered on savings account is low, it cannot be said they do not pay any risk premium.