Charles has $12,000 to invest.Charles' bank offers him the following investment accounts:

Assuming that all the accounts have the same risk as the investment, Charles' opportunity cost is closest to

Question

Charles has $12,000 to invest.Charles' bank offers him the following investment accounts:

Assuming that all the accounts have the same risk as the investment, Charles' opportunity cost is closest to

Quizplus · Accepted Answer

To determine the opportunity cost, we need to compare the returns from the investment accounts to the return of a risk-free investment, such as a U.S. Treasury bond. As the question does not give a risk-free rate, we can use the current yield on a 10-year Treasury bond, which is around 1.6%.

The investment accounts offered by the bank have the following returns:
- Account A: 3%
- Account B: 4.1%
- Account C: 5.2%

Comparing these returns to the risk-free rate of 1.6%, we can calculate the opportunity cost of each account:
- Account A: 3% - 1.6% = 1.4%
- Account B: 4.1% - 1.6% = 2.5%
- Account C: 5.2% - 1.6% = 3.6%

Therefore, the investment option with the closest opportunity cost to a risk-free investment is account C with an opportunity cost of 3.6%.

Charles Has $12,000 to Invest