Security A has a higher standard deviation of returns than security B. We would expect that:
I. Security A would have a risk premium equal to 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 ratio of A will be higher than the Sharpe ratio of B.

Question

Quizplus · Accepted Answer

Option I cannot be determined solely based on the information given, as it depends on factors such as market conditions and investor perception of risk.

Option II is correct, as a higher standard deviation implies a larger variation in returns and therefore a wider range of possible outcomes.

Option III is incorrect, as the Sharpe ratio takes into account both the mean and the standard deviation of returns. A higher standard deviation does not necessarily imply a better Sharpe ratio, as the higher risk needs to be compensated by a higher expected return.

Security a Has a Higher Standard Deviation of Returns Than