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6 August, 04:28

You are considering two securities. Security A has a historical average annual return of 7% and a standard deviation of 3%. Security B has a historical average annual return of 7% and a standard deviation of 9%. From this information you can conclude that:

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  1. 6 August, 07:01
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    Security B is riskier than Security A.

    Step-by-step explanation:

    Security A and B have the same historical average annual return which is 7%, meaning that both of them have had the same results over the years.

    However, the standard deviation of A is 3% and the standard deviation of B is 9%, therefore we can conclude that Security A is safer than Security B because a low standard deviation indicates that the annual returns tend to be close to the average (mean), while a high standard deviation indicates that the annual returns are spread out over a wider range of values.

    For example:

    Security A has this values over the years:

    6, 7, 8, 7 where mean is 7.

    Security B has this values over the years:

    1, 13, 4, 12 where the mean is also 7.

    But, A has a lower standard deviation and B a higher one, therefore, Security B is riskier.
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