Theory and Investment Analysis-Free-Samples-Myassignmenthelp.com

Question: We have seen over long periods of time, Stock Investments have tended to substantially outperform bond investments. However, it is not at all uncommon to observe investors with long horizons holding entirely bonds. Are such Investors Irrational? Answer: It is true that the investment in shares have increased substantially in the recent past years. The investors are now switching the conventional investment options such as bonds and fixed deposits. The share market provides variety of investment options with high returns which attracts the investors more. However, there are investors which still prefer the conventional investment options such as bond and fixed deposits. These investors are risk averse investors and they hesitate in taking high risk. The share market provides high return but at the same time it also exposes the investor to high risk (Elton et al., 2009). Conversely, the investment in bond provides lower returns but it also reduces the risk. Further, the investment in bond adds to the stability to the income of investor as it provides periodical returns in the form of interest. Therefore, it could be inferred that the investors who still prefer investment in the bonds are not irrational rather they are risk averse. Reference Elton, E.E., Gruber, M.J., Brown, S.J., Goetzmann, W.N. 2009. Modern Portfolio Theory and Investment Analysis. John Wiley Sons.