What are the implications of having a higher average annual return?

Having a higher average annual return typically indicates greater potential rewards from an investment, which often goes hand-in-hand with increased risk and volatility. Investments that offer higher returns tend to be associated with assets that are less stable, such as stocks or certain types of mutual funds. These assets can experience significant price fluctuations over time, reflecting the higher level of uncertainty and potential for loss.

Investors need to be prepared for this volatility, as market conditions can lead to sharp increases in value as well as steep declines. This relationship between risk and return is a fundamental principle in finance; higher expected returns are often a reflection of taking on additional risk. Therefore, choosing investments that offer higher average annual returns entails a careful consideration of one's risk tolerance and investment horizon.

The other options relate to different aspects of investment returns and risk that do not correlate directly with the concept of higher average annual returns in the same way. For example, decreased returns, guaranteed capital preservation, or a lower likelihood of dividends do not capture the essence of the risk-return tradeoff that is intrinsic to investments with higher average returns.