Why do investors require a higher expected rate of return on common stock than on bonds?
A)Common stock is a riskier investment than bonds.
B)Common stock is a lower risk investment than bonds.
C)Common stock has a shorter maturity than bonds.
D)Dividends are considered taxable income, but interest is not.

Question

Quizplus · Accepted Answer

Common stock is considered a riskier investment than bonds because stock prices can fluctuate more widely in response to changes in the economy, the company's financial performance, or investor sentiment. As a result, investors generally demand a higher expected rate of return to compensate for this additional risk. Bonds, on the other hand, are generally considered to be a safer investment because they offer a fixed income stream and a predetermined repayment of principal.

Why Do Investors Require a Higher Expected Rate of Return