The higher the standard deviation of an investment relative to its rate of return, the

The higher the standard deviation of an investment relative to its rate of return, the

• A. The higher the level of risk for a given rate of return.
• B. The lower the expected rate of return and the lower the level of risk.
• C. The greater the expected rate of return and the lower the level of risk.
• D. The lower the level of risk for a given level of return.

Answer: (A)

Standard deviation measures how much investment returns can swing around the expected rate. When this dispersion is large relative to the expected return, there is more volatility for the same level of return, meaning higher risk for that return. In practice, two investments with similar targets can differ greatly in risk if one has much greater variability in returns. The idea is the risk per unit of return goes up as volatility grows. The other options would imply lower risk or higher return with less risk, which doesn’t fit the relationship between greater dispersion and higher risk.

Standard deviation measures how much investment returns can swing around the expected rate. When this dispersion is large relative to the expected return, there is more volatility for the same level of return, meaning higher risk for that return. In practice, two investments with similar targets can differ greatly in risk if one has much greater variability in returns. The idea is the risk per unit of return goes up as volatility grows. The other options would imply lower risk or higher return with less risk, which doesn’t fit the relationship between greater dispersion and higher risk.