If the variability of the returns on large-company stocks were to decrease over the long-term, you would expect which one of the following as related to large-company stocks to occur as a result?
A) Increase in the risk premium
B) Increase in the average long-term rate of return
C) Decrease in the 68 percent probability range of returns
D) Increase in the standard deviation
E) Increase in the geometric average rate of return

Question

Quizplus · Accepted Answer

If the variability of returns on large-company stocks were to decrease, then the 68 percent probability range of returns would also decrease. This means that returns on large-company stocks would be more predictable and less risky, which could lead to a decrease in the required risk premium for investors. It does not necessarily indicate an increase in the average long-term rate of return or the standard deviation. The geometric average rate of return depends on both the average rate of return and the variability of returns, so it could increase or decrease depending on the magnitude of those changes.

If the Variability of the Returns on Large-Company Stocks Were