Equity investors accept greater risks.

2010 April no 6

Historically, which of the following best explains why investments in equities have tended to outperform fixed interest investments in the very long term?

A. Equity investors accept greater risks.
B.Equity investors tend to overstate the returns from their investments.
C. The returns on each type of investment are calculated in different ways.
D. Returns from fixed interest investments ignore the effects of inflation.

why say that equity investor accept greater risk ? why B cannot be accepted ?

 

Hi
This question revolves mostly about the risk-return concept. The market rewards investors who are willing to accept more risks by offering them a higher return. Since equities represent higher risks compared to a bond, they are more likely to obtain a higher return in the long run. This is because a bond for a specific term will offer a nominal return while equities will offer a real return which is likely to compensate for change in inflation.

B cannot be the answer as investors cannot overstate returns as such. They are likely to obtain a known amount of dividend which is disclosed in the FS.
Hope this helps.

 

thanks for the help