Question

Security A has a higher standard deviation of returns than Security B. We would expect that ______.

I. Security A would have a higher risk premium than 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 measure of A will be higher than the Sharpe measure of B.
A. I only
B. I and II only
C. II and III only
D. I, II and III

Answer 1

Only statement 2 is correct as the likely range of returns of security A would be higher as it has a higher standard deviation which means that its returns deviate more from the mean than security B, which implies that the range of returns of security A is likely to be higher than the range of return on security B.

Statement 1 is wrong because a security has higher risk premium when it has a higher Beta, which means that when the standard deviation is linked to the market returns than it may have a higher risk premium, but just on the basis of standard deviation we can not make that decision.

Statement 3 is wrong because we do not know the risk premiums of both the stocks so we cannot calculate the sharpe ratio as is calculated by dividing the excess returns by the standard deviations of stocks.

Step-by-step explanation: