Generally, the return on an equity investment is higher than the return on debt or preferred stock because:

Question

Quizplus · Accepted Answer

Equity is considered to be riskier than debt or preferred stock as there is no guaranteed return for equity investors, and they are the last to be paid in the event of liquidation. This higher risk results in a higher potential return. People may be more willing to invest in debt as it offers a fixed return, and the cost of preferred stock is usually between the cost of debt and equity. However, these factors do not fully explain why the return on equity is typically higher.

Generally, the Return on an Equity Investment Is Higher Than