Risk, Return, and Investment Risk vs. Return 10 9 Return Potential 7 6 5 ONA Pass Book Savings Certificates of Deposit U.S. Treasury Bills Commercial Paper Junk Bonds Common Stock Investment Grade Bonds Speculative Stock Preferred Stock Risk Potential Financial Risk Investments are subject to risk -- that is, the outcome of the investment is uncertain Different investments have different degrees of risk with some being more risky than others. Certain types of accounts at banks and savings and loans are guaranteed up to a fixed amount by the Federal Deposit Insurance Corporation (FDIC). These accounts include checking accounts (demand deposits), savings accounts, and certificates of Hannel limita. I ninnnnnnnte man ha nudin minuuhudiant dtyd 29 ng by spreading investments among several investment choices. for instance investor can reduce risk by putting money into a mutual fund, distributing the money among several fund choices rather than buying stock in a single company. 12. Why does diversification make it more difficult to get a high return? while diversification reduces risk it also make it more difficult to get a high return since all your investments would need to do very well not just one company in order to achieve a high return 13. Based on the information in the graph, what is the relationship between the risk involved in an investment and the potential return on that investment? (That is, if the risk is higher, what happens to the return? If the risk is lower, what happens to the return?) 14. Based on the information in the graph, how does the return potential on common stock compare to that on passbook savings? 15. Based on the information in the graph, how does the return potential on U.S. Treasury bills compare to that on investment grade bonds