[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Table 39.1
ALTERNATIVE INVESTMENTS AND HOW THEY FARE
Investment Expected returns Risk Tax advantages Liquidity
Banking savings Low Low None High
accounts
CDs (certificates Slightly higher than Low None Slightly less than
of deposit) savings accounts savings accounts
Houses High returns from Used to be thought Many special tax Relatively illiquid;
mid-1970s to mid- safe; viewed to be advantages may take long
1980s; in many somewhat riskier now time to find
areas, negative re-
“good buyer”
turns in late 1980s,
early 1990s, high
returns since late
1990s
Federal government Normally slightly Uncertain market value Exempt from state Small charge for
long-term bonds higher than T-bills next period; uncertain income tax selling before
purchasing power in
maturity
long run
Corporate Bonds Higher return than Risks of long-term None Slightly less liquid
federal bonds federal bonds plus than federal
risk of default
bonds (depends
on corporation
issuing bond)
Stocks High High Capital gains re- Those listed on
ceive tax prefer- major exchange
ence if stocks held are highly liquid;
for more than 1 year others may be
highly illiquid
Mutual Funds Reflect assets in Reflect assets in Reflect assets in High
which funds are which funds are which funds are
invested invested; reduced invested
risk from diversification
T-bills About same as CDs Low Exempt from state Small charge for
income tax
selling before
maturity
Few assets offer guaranteed returns. If the stock market booms, a stock share
might yield 20 percent; but if the market drops, the total return might be zero or
even negative. To compare two alternative investment options, we apply the concept
of expected returns. The expected return on an asset is the single number
that takes into account both the various possible returns per dollar invested and
the chances that each of those possibilities will occur. If there is a one-in-four chance
(a 25 percent probability) a stock will yield a 20 percent return over the next year,
DESIRABLE ATTRIBUTES OF INVESTMENTS ∂ 871