Question

Justify the historic ranking of returns for the following three categories of investment, listed from highest to lowest return: common stocks, long-term Treasury bonds, and Treasury bills.

Answer 1

Generally an investment with high risk has to provide high returns otherwise no one would invest

As we know common stocks are most risky hence they should provide highest returns

Long term trasury bonds are less riskier than common stock but more riskier compared to Treasury Bills because of long maturity leading to high interest rate risk. Hence, they should provide returns lower than common stock but higher than Treasury Bills.

Treasury Bills have the lowest risk hence they should provide lowest returns.