Why is opportunity cost lower in a 3-year investment compared to a 5-year investment?

The rationale behind the opportunity cost being lower in a 3-year investment compared to a 5-year investment relates to the amount of capital that remains tied up in the investment for a shorter period. When capital is invested for a shorter time frame, such as three years instead of five, investors have greater flexibility to reallocate their resources or take advantage of new opportunities that arise.

In a longer investment period, the capital is committed for a more extended period, which can limit the ability to respond to changing market conditions or to invest in potentially more lucrative opportunities that may become available. This extended commitment results in a higher opportunity cost as there are more potential avenues for return that an investor cannot pursue while their funds are locked into the existing investment.

Therefore, because a shorter investment duration allows for quicker access to capital and more freedom to switch investments or strategies, the opportunity cost is lower in a 3-year investment compared to a 5-year investment.