If returns on stock A are more volatile than the returns on stock B, the geometric average return of stock A will be ________ the geometric average return of stock B when their arithmetic average returns are same.
A) same as
B) higher than
C) lower than
D) always same as

Question

Quizplus · Accepted Answer

If the returns on stock A are more volatile than the returns on stock B, it implies that stock A has a higher risk than stock B. Higher risk demands a higher expected return to compensate for the same. Therefore, the geometric average return of stock A will be lower than the geometric average return of stock B, given that their arithmetic average returns are the same.

If Returns on Stock a Are More Volatile Than the Returns