The risk associated with preferred stock is typically __________ compared to common stocks and __________ compared to bonds.

The correct answer indicates that the risk associated with preferred stock is typically lower compared to common stocks and higher compared to bonds.

Preferred stock generally occupies a middle ground regarding risk. It has characteristics of both stocks and bonds, which affects its risk profile. On one hand, preferred stockholders have a more secure claim on assets than common stockholders if a company goes bankrupt. This makes preferred stock less risky than common stock because common shareholders are last in line to receive any liquidation proceeds. Therefore, the statement that preferred stock is lower risk compared to common stocks holds true.

On the other hand, preferred stock is usually seen as having higher risk than bonds because bonds are secured through debt. Bondholders possess a legal claim for repayment before any equity holders (including preferred shareholders) in the event of liquidation or default. Furthermore, bond payments (interest) are often guaranteed, while preferred dividends can be suspended by the company if it experiences financial difficulties. This makes preferred stock riskier than bonds, aligning with the assertion that they are higher in risk compared to bonds.

Thus, the understanding that preferred stock risk is lower than common stock risk but higher than bond risk provides a clear rationale for selecting the correct answer.