An investment advisor makes the following two statements to a client:
- Statement 1: 'If you deposit $1,000 into a 1-year Certificate of Deposit (CD) with a 4% interest rate, your rate of return for that year will be 4%, because the interest rate dictates the return on this type of guaranteed asset.'
- Statement 2: 'If you buy a share of stock for $1,000, its rate of return is also determined by an interest rate, but one that is set by the stock market's overall performance.'
Based on the conceptual distinction between an interest rate and a rate of return, which of the following is the best evaluation of the advisor's statements?
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An investment advisor makes the following two statements to a client:
- Statement 1: 'If you deposit $1,000 into a 1-year Certificate of Deposit (CD) with a 4% interest rate, your rate of return for that year will be 4%, because the interest rate dictates the return on this type of guaranteed asset.'
- Statement 2: 'If you buy a share of stock for $1,000, its rate of return is also determined by an interest rate, but one that is set by the stock market's overall performance.'
Based on the conceptual distinction between an interest rate and a rate of return, which of the following is the best evaluation of the advisor's statements?
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