Question

7. How can an investor lose money on a stock while making money on a bond investment if there is a reward for bearing risk? Aren't stocks riskier than bonds? (3 pts)

Answer 1

There is a reward for bearing risk over the long-term. However, the nature of risk implies the returnson a high risk security will be more volatile than the returns on a low risk security. It is theacceptance of this risk which justifies the potential long-term reward.

Stocks are generally considered to be more risky than bonds. For short-term investors, stocks are indeed riskier than Bonds. But for long-terminvestors the evidence from actual historical returns indicates that Bonds were actually riskier than stocks. But it all depends on having a proper definition of what risk means.