Chapter 5 Presents Evidence That the Average Annual Rate of Return

question 16

Essay

Chapter 5 presents evidence that the average annual rate of return on common stocks over many years has exceeded the return on government bonds in the United States,while returns on common stocks have also exhibited more volatility than returns on U.S.government bonds.Suppose that last year,the realized rate of return on government bonds exceeded the return on common stocks.Your colleague suggests that "last year shows us that investors are now willing to settle for lower returns on stocks than on bonds." How would you interpret this result?

---

Definitions:

Equilibrium Level

The state where market supply and demand balance each other, and, as a result, prices become stable.

Quantity Demanded

The total amount of a good or service that consumers are willing and able to purchase at a given price.

Quantity Supplied

The total amount of a specific good or service that is available for purchase at a given price and time.

Product Shortage

A situation where the demand for a product exceeds the supply available in the market.