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Risk and return for common stocks vs. corporate bonds

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Thoroughly explain the historical relationships between risk and return for common stocks versus corporate bonds, and thoroughly explain how diversification helps in risk reduction in a portfolio.

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Solution Summary

The solution provides the difference between the risk and return of common stock versus corporate bonds and how diversification helps in minimizing losses.

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Common stocks are the riskiest of all investments as these are the last to be paid if a company liquidates and those who buy common stocks can experience drastic decreases in value on a day to day basis. Corporate bonds are a little safer as these are one of the first to be paid if a company goes under but the question is to how much is left to pay out the bonds ...

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