Over time, what is generally true about the average rate of return on stocks compared to other types of investments?

• A. Stocks tend to have a higher average rate of return than bonds and savings accounts.
• B. Stocks usually have a lower average rate of return than savings accounts.
• C. Stocks always guarantee a positive rate of return every year.
• D. Stocks and bonds typically have the same average rate of return over time.

Answer: (A)

Verified step by step guidance

1. Understand the concept of 'average rate of return': The average rate of return measures the profitability or performance of an investment over a period of time. It is calculated by averaging the returns earned annually or over a specific time frame.
2. Compare the characteristics of stocks, bonds, and savings accounts: Stocks are equity investments that represent ownership in a company and typically have higher risk and potential for higher returns. Bonds are debt instruments with lower risk and generally lower returns compared to stocks. Savings accounts are low-risk investments with minimal returns.
3. Analyze historical trends: Historically, stocks have shown a higher average rate of return compared to bonds and savings accounts over long periods. This is due to their higher risk and growth potential, as companies reinvest profits to grow their businesses.
4. Address misconceptions: Stocks do not guarantee a positive rate of return every year. Their performance can vary significantly depending on market conditions, economic factors, and company-specific events. However, over time, they tend to outperform other investment types.
5. Conclude based on the comparison: Stocks tend to have a higher average rate of return than bonds and savings accounts over time, making them a preferred choice for long-term investors seeking growth.