The standard deviation of the returns of Stock A is 45.9 percent, and the standard deviation of the returns of Stock B is 52.7 percent. Which of the following statements about the stocks is correct?
A)Stock A has a wider (more dispersed) probability distribution than Stock B, and hence lower total risk.
B)Stock A has a tighter probability distribution than Stock B, and hence lower total risk.
C)Stock B has a wider (more dispersed) probability distribution than Stock A, and hence lower total risk.
D)Stock B has a tighter probability distribution than Stock A, and hence lower total risk.
E)Stock B has a lower risk than Stock A, but nothing can be said about their probability distributions.

Question

Quizplus · Accepted Answer

The standard deviation is a measure of the dispersion or spread of a set of values. A higher standard deviation indicates a wider spread of values. Since Stock A has a standard deviation of 45.9 percent, which is lower than Stock B's 52.7 percent, Stock A has a tighter probability distribution than Stock B. This generally implies lower total risk for Stock A compared to Stock B, assuming the standard deviation is used as a measure of risk.

The Standard Deviation of the Returns of Stock a Is