Which of the following statements best explains how the risk level of your investment choices affects your total retirement benefit?

• A. Only government bonds can increase your total retirement benefit, regardless of risk.
• B. Higher-risk investments may offer higher potential returns, which can increase your total retirement benefit, but also come with a greater chance of losses.
• C. Lower-risk investments always guarantee a higher total retirement benefit compared to higher-risk investments.
• D. The risk level of investments has no impact on your total retirement benefit.

Answer: (B)

Verified step by step guidance

1. Understand the concept of risk and return: In financial accounting and investment, risk refers to the uncertainty of returns on an investment. Higher-risk investments typically have the potential for higher returns, but they also carry a greater chance of losses. Lower-risk investments are more stable but may offer lower returns.
2. Analyze the relationship between risk and retirement benefits: Retirement benefits are influenced by the performance of investments over time. Higher-risk investments, such as stocks, may grow significantly, increasing the total retirement benefit, but they also have the potential to lose value. Lower-risk investments, such as government bonds, are safer but may grow at a slower rate.
3. Evaluate the statement 'Only government bonds can increase your total retirement benefit, regardless of risk': This is incorrect because other types of investments, including higher-risk ones, can also increase retirement benefits depending on their performance.
4. Assess the statement 'Lower-risk investments always guarantee a higher total retirement benefit compared to higher-risk investments': This is incorrect because lower-risk investments typically offer lower returns, which may not result in a higher total retirement benefit compared to higher-risk investments with successful performance.
5. Conclude with the correct explanation: Higher-risk investments may offer higher potential returns, which can increase your total retirement benefit, but they also come with a greater chance of losses. This highlights the trade-off between risk and return in investment decisions.