Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?
A) Broker A: "There are risks in holding stocks, even in a highly diversified portfolio."
B) Broker B: "Portfolios with smaller standard deviations have lower risk."
C) Broker C: "Stocks with greater risks offer lower average returns."
D) They all gave her correct advice.

Question

Amanda talks with several different brokers at a social gathering. She hears the following advice from brokers A, B, and C. Which broker, if any, gave her incorrect advice?
A) Broker A: "There are risks in holding stocks, even in a highly diversified portfolio." 
B) Broker B: "Portfolios with smaller standard deviations have lower risk."
C) Broker C: "Stocks with greater risks offer lower average returns."
D) They all gave her correct advice.

Quizplus · Accepted Answer

Broker C gave incorrect advice. The risk and return trade-off in investing suggests that higher risk investments, in general, offer higher average returns. This is known as the risk premium. Therefore, stocks with greater risks should offer higher average returns.

Amanda Talks with Several Different Brokers at a Social Gathering