Opportunity Cost

What this video covers

• The precise definition of opportunity cost as the return on the next best alternative investment, not the return on all possible alternatives
• Why holding cash or keeping money in a savings account during a bull market carries an opportunity cost equal to the missed market gains
• The critical distinction between explicit cost (actual out-of-pocket financial loss) and implicit cost (opportunity cost as a foregone gain)
• How locking into a long-term bond at a fixed rate creates opportunity cost when market interest rates rise above the locked rate
• Why opportunity cost is a factor in risk tolerance discussions: risk-averse investors accept higher opportunity cost in exchange for lower risk
• The exam's most common trap: scenarios where an investor lost nothing in absolute terms but still incurred opportunity cost by choosing a lower-returning investment