Chapter 3: #3

Chapter 4: #5

3.A financial adviser has just given you the following advice: “Long term bonds are a great
investment because their interest rate is over 20%” is the financial advisor, necessarily right?

There are a lot of risks that come with long-term bonds. Risks like maturity risk premium and
liquidity risks make long-term bonds riskier investments compared to short-term bonds. Since
high risks come with long-term bonds, a higher return is expectable, but a return of 20% seems
a bit too unrealistic. Therefore, I believe that the financial advisor is not necessarily right.

5. “No one who is risk-averse will ever buy a security that has a lower expected return, more
risk, and less liquidity than another security.” Is this statement true, false or uncertain? Explain
your answer.

I believe the statement is true because, for a risk-averse investor, low expected return, more
risk, and less liquidity make a security less attractive relative to other securities in the market.
Risk-averse investors only take a risk in the belief that they will be compensated for their
actions. Therefore risk-averse investors dislike risk.