Future Business Leaders of America (FBLA) Personal Finance Practice Test

Generally, how does the rate of return correlate with the safety of an investment?

1. Higher risk leads to higher returns

2. Safe investments yield moderate returns

3. Safe investments yield high returns

4. Safe investments typically have a low rate of return

The correct answer is: Safe investments typically have a low rate of return

The correct answer indicates that safe investments typically have a low rate of return, which aligns with the fundamental principle of investing known as the risk-return tradeoff. This principle suggests that investments that are considered safer or less risky, such as government bonds or high-quality corporate bonds, generally offer lower returns compared to riskier investments like stocks or startup ventures. This correlation arises because investors seek compensation for taking on additional risk; thus, they expect higher returns as a reward for the increased uncertainty associated with their investments. Safe investments, on the other hand, provide more stability and predictability, which naturally limits their potential for high returns. Consequently, investors may choose these safer options during times of market volatility or economic uncertainty, even if it means accepting lower yields. In contrast, the other choices do not accurately capture the relationship between risk and return in investments. Higher returns are typically linked to higher risks, while moderate returns are associated with a balance of risk, which does not imply that safe investments yield high returns. Recognizing these relationships is essential for making informed decisions in personal finance.