Question

which of the following statements is true?
a. bonds have more risk than stocks, but offer more return.
b. stocks have more risk than bonds, but offer more return.
c. stocks tend to offer a greater risk, while bonds tend to offer a greater return.
d. bonds tend to offer a greater risk, while bonds tend to offer a greater return.

Explanation:

To determine the true statement, we analyze the risk - return relationship of stocks and bonds:

• Stocks represent ownership in a company. Their value can be highly volatile due to factors like company performance, market conditions, and economic trends. This high volatility means stocks have a relatively high level of risk. In return for taking on this higher risk, stocks also have the potential to offer higher returns over the long - term, as companies can grow in value and distribute profits (in the form of dividends) or the stock price can appreciate significantly.
• Bonds are debt instruments. When an investor buys a bond, they are essentially lending money to an entity (like a government or a corporation). Bonds are generally considered less risky than stocks because the borrower has a legal obligation to repay the principal and make interest payments. Since they are less risky, the returns on bonds (in the form of interest payments) are typically lower than the potential returns on stocks.

Now let's analyze each option:

• Option a: Bonds are less risky than stocks and also offer lower returns. So this statement is false.
• Option b: Stocks are more volatile (riskier) than bonds, and due to this higher risk, they have the potential for higher returns. This statement is true.
• Option c: Stocks are riskier but also have the potential for greater returns, while bonds are less risky and have lower returns. So this statement is false.
• Option d: There is a repetition of "bonds" and the statement misrepresents the risk - return relationship (bonds are less risky and have lower returns). So this statement is false.

Answer:

b. Stocks have more risk than bonds, but offer more return.