Comparative Volatility of Equities, Housing, and Bank Deposits in the US
Based on historical data from the last century in the US, different asset classes exhibit varying levels of investment risk, as measured by price volatility. Equities have demonstrated the highest volatility, making them the riskiest. Housing is less volatile than equities but riskier than bank deposits, which have been the least volatile asset class.
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Introduction to Macroeconomics Course
Ch.6 The financial sector: Debt, money, and financial markets - The Economy 2.0 Macroeconomics @ CORE Econ
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Investment Strategy Evaluation
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An asset class is known to have a high average annual return but also experiences significant year-to-year price fluctuations. For which of the following investors would this asset be considered a riskier choice, and why?
An investor is choosing where to place a sum of money that they will need in full in exactly one year. They are presented with two options:
- Asset A: Characterized by a high average annual rate of return, but also significant year-to-year price fluctuations.
- Asset B: Characterized by a much lower average annual rate of return, but with a very stable price.
Which of the following statements best analyzes the reason a rational investor might prefer Asset B for this specific situation?
An investor observes that, over the last 50 years, the average annual return on equities has been 9%, while a standard savings account has returned an average of 1%. Based on this information, it is always a less risky strategy to invest funds needed for a large purchase in 12 months' time in equities rather than in the savings account.
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Learn After
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An individual who is highly risk-averse wants to save money for a goal they need to meet in two years. They are primarily concerned with preserving the initial amount they save and want to avoid the possibility of significant, unpredictable losses, even if it means lower potential growth. Based on the typical price stability of different asset types in the US over the last century, which of the following strategies would be most suitable for this individual?
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A financial advisor claims that because bank deposits have historically been the most stable asset class in the US, they are unequivocally the best option for an individual whose primary goal is long-term wealth growth over a 30-year horizon.
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An investor observes that over the past several decades in the US, the value of their stock portfolio has experienced much larger and more frequent price changes compared to the value of their home. This observation is consistent with the general principle that, of the three main asset classes (equities, housing, and bank deposits), ____ have historically exhibited the highest price volatility.
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