Asked by Tarun Rajpurohit on Jun 04, 2024
Verified
Which of the following statements is/are true about the variance of the possible future returns on a financial asset?
A) The standard deviation of the possible returns on an asset is equal to the square root of the variance of the possible returns.
B) Low-variance securities are high-standard deviation securities.
C) The variance and the standard deviation of the possible returns on a risk-free asset are negative.
D) Standard deviation of returns can be computed without considering probabilities, but variance cannot.
E) All else equal, assets with high average returns will also have high standard deviations relative to those with lower returns.
Variance
A statistical measure of the dispersion of data points in a data set, indicating how far each data point lies from the mean.
Financial Asset
Any asset that is cash, an equity instrument of another entity, or a contractual right to receive cash or another financial asset.
Risk-free Asset
An investment with zero default risk, often assumed to be government bonds, providing a guaranteed return.
- Understand the basic concepts and calculation of variance and standard deviation for financial assets.
Verified Answer
CC
Cadee CooperJun 06, 2024
Final Answer :
A
Explanation :
A) The standard deviation of the possible returns on an asset is equal to the square root of the variance of the possible returns. This is a fundamental principle in statistics, where the standard deviation is indeed the square root of the variance, providing a measure of the dispersion of a set of values.
Learning Objectives
- Understand the basic concepts and calculation of variance and standard deviation for financial assets.