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The average annual rate of return on common stocks over many years has exceeded the return on...

Question:

The average annual rate of return on common stocks over many years has exceeded the return on government bonds in the United States. Why is this pattern observed?

Risk Vs. Return:

Risk and return are one of the most fundamental relationships in finance. Put simply, the relationship shows that the more risk an investment has, the greater the return the investor requires to make up for the risk. The risk premium in the market is the amount of return an investor can make over and above the risk-free rate.

Answer and Explanation:

The average annual rate of return on common stocks over many years has exceeded the return on government bonds in the United States because stocks are riskier than government bonds so investors require a higher rate of return.


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