Which of the following is true about risk and return? aRiskier assets will, on average, earn lower returns. bIn general, the greater the risk, the greater the required reward. cBased on historical data, there is no reward for bearing risk. d
Question
Which of the following is true about risk and return? aRiskier assets will, on average, earn lower returns. bIn general, the greater the risk, the greater the required reward. cBased on historical data, there is no reward for bearing risk. d
Solution
The correct answer is b. In general, the greater the risk, the greater the required reward. This is a fundamental concept in finance known as the risk-return tradeoff, which states that the potential return on an investment increases with the level of risk associated with it. Investors require a higher return for taking on a higher level of risk.
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