The stock market and the bond market. Over the period 1928-2013, investments in an index of the Standard and Poor’s 500 stocks have given annual returns of 9.55%, investments in 10-year Treasury Bonds have given a return of 4.93%, and investments in 3-month Treasury bills have yielded 3.55%.
a. Which is the most risky of these investments? Describe the risks associated with each investment. Do you think that risk explains the different rates of return?
b. Explain which is the most liquid of these investments? Do you think this explains the different rates of return?
c. You can buy common stocks only from one of 1366 brokers with a seat on the New York Stock Exchange; treasury bills and bonds are purchased through a broker or directly from the United States government. Do you think these differences might explain the different rates of return?
d. How might these different rates of return encourage or discourage the efficient allocation of liquidity and investment resources?