Over the past 84 years, we have observed that investments with the highest avera

Question

Over the past 84 years, we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following answers correctly ranks investments from highest to lowest risk (and return), where the security with the highest risk is shown first, the one with the lowest risk last?
   a. U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks.   
   b. Small-company stocks, large-company stocks, long-term corporate bonds, 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. Large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills.   
   e. Small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, U.S. Treasury bills.

explain your answer

Explanation / Answer

correct option is "B" -Small company stock , large company stock , long term corporate bonds , long term government bonds , US treasury bonds.

Reason : It is said "Higher the risk , Higher the return "

so small company stock carries a higher risk of default so it gives higher return .

Then large company stock carries higher risk than bonds but lower risk than small stock company.

Bonds usually carries a fixed rate of return so they are less risky .However corporate bonds carries higher risk than government bonds and US treasury bills.

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