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Risk of investments

Over the past 75 years, we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of their annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following lists correctly ranks investments from highest to lowest returns and risk (thus, the highest risk security should be shown first, the lowest risk securities shown last)?

A) small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills
B) small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, U.S. Treasury bills
C) large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds
D) U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks
E) large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills

Solution Preview

Answer: A) small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury ...

Solution Summary

The solution ranks investments from highest risk to lowest risk.

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