People who might need to retrieve part or all of their investment relatively soon (such as...

People who might need to retrieve part or all of their investment relatively soon (such as the elderly) are oftern advised to invest a higher percentage of their money in bonds, and thus a lower percentage in stocks, than are eople who can leave the investment untouched for decades. We know, however, that bonds typically have a lower rate of return than do stocks. Why would these people be advised to invest in assets that give lower rates of return (on average) than do other assets?

Since bondholders get paid before stockholders get paid in the event of bankruptcy of a firm, the average "real" rate of return on stocks and bonds must be the same, with bonds being less risky.
While stocks have higher average rates of return in the long run, bonds actually have higher average rates of return in the short run. As such, bonds are likely to be more profitable for the groups of people who might need to get their investment back in a relatively short period of time.
While stocks have a higher rate of return in the long run, they are much more volatile (riskier) in the short run. As such, they have a higher probability of having less than the original value of the investment for people who might need to withdraw the investment in the short run.
This is actually bad advice. You should always invest in whatever has the highest average rate of return.

Expert Solution

Option c is correct

While stocks have a higher rate of return in the long run, they are much more volatile (riskier) in the short run. As such, they have a higher probability of having less than the original value of the investment for people who might need to withdraw the investment in the short run.

Rahul Sunny answered 2 years ago

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