households on the supply side of those markets. We can divide the mechanisms for savings available to

households into several categories: deposits in bank accounts; bonds; stocks; money market mutual funds;

stock and bond mutual funds; and housing and other tangible assets like owning gold. We need to analyze each

of these investments in terms of three factors: (1) the expected rate of return it will pay; (2) the risk that the

return will be much lower or higher than expected; and (3) the investment's liquidity, which refers to how

easily one can exchange money or financial assets for a good or service. We will do this analysis as we discuss

each of these investments in the sections below. First, however, we need to understand the difference between

expected rate of return, risk, and actual rate of return.

Expected Rate of Return, Risk, and Actual Rate of Return

The expected rate of return refers to how much a project or an investment is expected to return to the
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