Assume Share A has a standard deviation of 0.21 while Share B has a standard deviation of 0.10.If both Share A and Share B must be held in isolation, and if investors are risk averse, we can conclude that Share A will have a greater required return.However, if the assets could be held in portfolios, it is conceivable that the required return could be higher on the low standard deviation stock.

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Quizplus · Accepted Answer

When held in isolation, investors will require a higher return for Share A due to its higher standard deviation. However, when held in a portfolio, diversification can reduce overall risk, and the lower standard deviation of Share B may make it a more attractive investment option, potentially resulting in a higher required return for Share B.

Assume Share a Has a Standard Deviation of 0