SIE practice questionmediumRisk — Opportunity Cost
Opportunity cost in investing refers to:
- AThe explicit fees and commissions paid on a trade
- BThe risk of losing the original investment principal
- CThe potential return given up by choosing one investment over another✓ Correct answer
- DThe tax liability on investment gains
Explanation
Why C — The potential return given up by choosing one investment over another
Opportunity cost is the potential return you forgo by selecting one investment over another. For example, if an investor puts $100,000 in a savings account earning 2% instead of stocks returning 10%, the opportunity cost is the forgone 8% return. Every investment choice has an opportunity cost — the next best alternative that was not chosen. This concept is important for understanding true investment costs.
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