How do short-term investments differ from long-term investments?

How do short-term investments differ from long-term investments?

• A. They have lower risk
• B. They are held for less than a year
• C. They yield higher returns
• D. They are intended for immediate use

Answer: (B)

Short-term investments are indeed characterized by their duration of holding, which is typically less than a year. This shorter time horizon distinguishes them from long-term investments, which are generally held for several years or even decades. The focus of short-term investments is on liquidity and accessibility, as investors often seek to use the funds sooner rather than later. This aspect is critical as it influences the choice of financial instruments typically involved in short-term investments, such as treasury bills, money market funds, or short-term bonds, which are designed to provide quick access to cash without the commitment of long-term securities. With this in mind, the other options, while they may contain elements of truth, do not define the core distinction that the duration of the investment holds. For example, lower risk and higher returns can vary across both investment horizons, and the intention of immediate use may also apply to specific long-term investments depending on the investor's strategy. However, the defining characteristic remains that short-term investments have a holding period of less than one year.

Short-term investments are indeed characterized by their duration of holding, which is typically less than a year. This shorter time horizon distinguishes them from long-term investments, which are generally held for several years or even decades. The focus of short-term investments is on liquidity and accessibility, as investors often seek to use the funds sooner rather than later. This aspect is critical as it influences the choice of financial instruments typically involved in short-term investments, such as treasury bills, money market funds, or short-term bonds, which are designed to provide quick access to cash without the commitment of long-term securities.

With this in mind, the other options, while they may contain elements of truth, do not define the core distinction that the duration of the investment holds. For example, lower risk and higher returns can vary across both investment horizons, and the intention of immediate use may also apply to specific long-term investments depending on the investor's strategy. However, the defining characteristic remains that short-term investments have a holding period of less than one year.