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

Question

Quizplus · Accepted Answer

I and II are correct because a higher standard deviation of returns indicates higher volatility, which typically requires a higher risk premium to compensate investors. It also means the range of potential returns is broader. III is not necessarily true because the Sharpe ratio also depends on the returns of the securities relative to their risk; a higher standard deviation does not guarantee a higher Sharpe ratio.

Security a Has a Higher Standard Deviation of Returns Than