The rate of return on bonds is lower than on stocks over time because
A) bond holders cannot diversify.
B) bonds have a lower standard deviation in returns.
C) stocks have less non-diversifiable risks than bonds.
D) bonds are subject to more random risks than stocks.

Question

Quizplus · Accepted Answer

Bonds have a lower standard deviation in returns compared to stocks, meaning that they have less variability in their returns over time. This is because bond payments are generally fixed and predictable, while stock returns are subject to more uncertainty and volatility. Because of this, investors require a higher rate of return in order to invest in stocks, which tends to drive up their long-term returns compared to bonds.

The Rate of Return on Bonds Is Lower Than on Stocks