If we assume that the standard deviation on Company A's shares is greater than that on Company B's shares, this indicates that:
I.the required rate of return on Company A's shares is higher than that on Company B's shares.
II.the required rate of return on Company A's shares is lower than that on Company B's shares.
III.the potential loss from Company A's shares is greater than that from Company B's shares.
IV.the potential loss from Company A's shares is smaller than that from Company B's shares.
V.there is no difference between the required rate of return on and potential loss from Company A's
Shares and those associated with Company B's shares.
A)I and III only.
B)I and II only.
C)II and III only.
D)II and IV only.
E)V only.

Question

Quizplus · Accepted Answer

The standard deviation is a measure of the volatility of a stock's price. A higher standard deviation indicates greater volatility and therefore greater potential risk. Therefore, statement III is true. Higher risk requires a higher rate of return to compensate investors, so statement I is also true. Statement II is false because if the required rate of return on Company A's shares were lower, that would imply that they are less risky, which contradicts the higher standard deviation. Statements IV and V are both false as they suggest that the potential loss or required rate of return are the same for both companies, which is not necessarily true when considering the standard deviation.

If We Assume That the Standard Deviation on Company A's