Asked by vaughn peens on Jun 04, 2024
Verified
Security A has a higher standard deviation of returns than security B. We would expect that:
I. Security A would have a risk premium equal to security B.
II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B.
III. The Sharpe ratio of A will be higher than the Sharpe ratio of B.
A) I only
B) II only
C) II and III only
D) I, II, and III
Standard Deviation
A statistical measure that quantifies the variation or dispersion of a set of data points.
Sharpe Ratio
A measure that indicates the average return earned in excess of the risk-free rate per unit of volatility or total risk, assessing the performance of an investment.
- Determine and explain the projected return rate and its standard deviation on an investment.
Verified Answer
ML
Manish LimbuJun 09, 2024
Final Answer :
B
Explanation :
Option I cannot be determined solely based on the information given, as it depends on factors such as market conditions and investor perception of risk.
Option II is correct, as a higher standard deviation implies a larger variation in returns and therefore a wider range of possible outcomes.
Option III is incorrect, as the Sharpe ratio takes into account both the mean and the standard deviation of returns. A higher standard deviation does not necessarily imply a better Sharpe ratio, as the higher risk needs to be compensated by a higher expected return.
Option II is correct, as a higher standard deviation implies a larger variation in returns and therefore a wider range of possible outcomes.
Option III is incorrect, as the Sharpe ratio takes into account both the mean and the standard deviation of returns. A higher standard deviation does not necessarily imply a better Sharpe ratio, as the higher risk needs to be compensated by a higher expected return.
Learning Objectives
- Determine and explain the projected return rate and its standard deviation on an investment.
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