How Much Is an Investor's Tolerance for Risk Worth Over

question 21

Essay

How much is an investor's tolerance for risk worth over a long horizon? Calculate the difference in accumulation in real terms for an investor who initially invests $25,000 and ignores it for 20 years in either a long-term Treasury bond portfolio or a portfolio of diversified common stocks. Assume the historic real returns of 2.1% annually for bonds and 9.3% for common stocks.

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Definitions:

Internal Attributions

Ascribing the causes of behavior to personal dispositions, traits, abilities, and feelings.

Situational Factors

refers to external influences that can affect individual behavior and decision-making processes.

Self-efficacy

The belief in one's own ability to succeed in specific situations or accomplish a task.

Cognitive Dissonance

The mental discomfort experienced by a person who holds two or more contradictory beliefs, ideas, or values at the same time.