Final answer:
In a portfolio, stocks and bonds are different in risk and return, and they are not highly correlated, so the correct answer is D) Both A and B are correct. Stocks have the potential for higher returns with higher risk, whereas bonds provide more stable returns with less risk. The correct option is d.
Step-by-step explanation:
In a portfolio, stocks and bonds are indeed different in risk and return, and they are not highly correlated. The correct answer to the question is therefore D) Both A and B are correct. Stocks typically offer higher returns compared to bonds but come with higher risk. In contrast, bonds provide more stable returns with less risk compared to stocks.
Over a sustained period, stocks have an average return higher than bonds, and bonds have an average return higher than a savings account. This is indicative of the trade-off between the expected return and the degree of risk involved. The higher average return of stocks compensates for their higher degree of risk.
Meanwhile, bonds exhibit intermediate risk and return characteristics. As the value of a bond fluctuates primarily due to interest rate movements, its risk profile is less than that of stocks, but more than a savings account, which has minimal risk and fluctuation in value.
The correlation between stocks and bonds can vary, but generally, they are not perfectly correlated, meaning that when one goes up, the other doesn't necessarily do the same. This lack of high correlation makes them effective tools for diversification within an investment portfolio. The correct option is d.