True, stocks have historically
delivered higher returns than bonds because there is a greater risk that, if
the company fails, all of the stockholders' investment will be lost. On the
flip side, however, there is a return to stockholders that could potentially dwarf what they could earn investing in bonds. Stock investors will
judge the amount they are willing to pay for a share of stock based on the
perceived risk and the expected return potential – a return potential that is driven by earnings
growth.
