Question

 

Investors face various choices of what they can invest in with varying amounts of risk. For example, stock prices are much more volatile than bond prices.

 

What is the typical reason why investors would choose to put their money into an investment with higher risk rather than one with lower risk?

 

• Because if all investors avoided low-risk investments, it would result in a financial crisis.
• Because risky investments feature advertising with attractive models wearing very risque outfits 
• Because they are stupid or are thrill-seekers.
• Because riskier investments typically have higher returns.
• Because they want to signal their courage to other investors and scare them away.
• Because riskier investments are insured by the FDIC. 
• Because they want smaller firms to get their fair share of investment.
• Because assuming enough risk in a portfolio qualifies investors for a large government tax credit

Answer 1

Answer - Because riskier investments typically have higher returns.

According to the risk-return tradeoff theory, higher risk is associated with greater probability of higher return and lower risk associated with a greater probability of lower return. The trade-off which the investor faces between risk and return while considering investment decision is called risk return trade-off.